What to Know About Federal Student Loans

What Are the Risks of a Federal Student Loan? | Student FinTech

We talked a lot about federal student loans vs. private student loans. Private loans are backed by banks and individual institutions. These private lenders decide what the terms of their loans are. Federal loans are loans funded by the federal government. There is less flexibility regarding payments. This is because they use a specific scale to decide how much money you will get for school. Here are a few this you should know about federal student loans before borrowing.

The federal budget is much higher and they have more available funds. However, they are a little less flexible and have greater penalties for not paying it back. With federal loans, you are able to refinance more quickly because you’re dealing with the federal government which has supposedly unlimited funds to allocate or rotate the money sources.

One well-known company that allows you to refinance your student loan is Sallie Mae. Check out their offerings for either new or refinanced lending options.

Refinancing is not the best for everyone, and you should pay off your loan as quickly as you can and not continue to owe the government money after you graduate. The estimated time for paying it off is around ten years, according to financial experts. If you go longer than this, you might end up owing the government money most of your life, and it may keep you from being able to borrow other money because of your vast debt.

Risks of Federal Student Loans

Federal student loans are a great option to help pay for college. However, there are a few risks involved:

  • Interest rates are typically locked into a certain percentage. (Except in the case of variable interest rates, which fluctuate and can be difficult to predict.)
  • Federal loans are subsidized by the federal government, which makes it less likely to be able to get out of.
  • The federal government has ways of reclaiming the money they loan to you if you’re unable to pay it back as expected.

It’s an extreme case, but sometimes people have even been arrested and held until they worked out an agreement to pay back their student loan that was in default.

The primary risk of a federal student loan is that you can have the government after you for not paying back your loan. The loan can continue to accrue interest even if you are working on payments. Interest accrues as long as you’re in deferment or forbearance. Since it is backed by the federal government, they know they can enforce your payment of a loan through a number of options, including criminal charges. This isn’t a common occurrence. Yet it can happen if you neglect your loans.