Is a Student Loan an Installment Loan? Everything You Need to Know

Student loans allow millions of students to pursue higher education every year. But with so many options available, it can get confusing to understand how these loans actually work. One common question is whether student loans are considered installment loans or revolving credit.

The short answer is that federal and private student loans are installment loans. This means you borrow a set amount upfront, which you repay in fixed monthly payments over a predetermined period of time.

Revolving credit like credit cards work differently – they allow you to borrow up to a certain limit, pay it back, and borrow again as needed. With student loans, you cannot reborrow as you pay back the amount.

In this comprehensive guide we’ll explain in simple terms

• What is an installment loan
• What is revolving credit
• The difference between installment and revolving credit
• Whether student loans are installment or revolving
• The pros and cons of installment loans
• Other ways to pay for college besides student loans

Let’s get started!

What is an Installment Loan?

An installment loan is a type of loan where you borrow a lump sum of money upfront and repay it in equal monthly payments over a set period of time, These types of loans have predetermined payment amounts and due dates

Some examples of common installment loans are:

• Mortgages
• Auto loans
• Personal loans
• Federal and private student loans

The amount you borrow with an installment loan and the repayment terms like length, interest rate, and monthly payment amount are all set when you take out the loan. Your monthly payments go towards both the principal (the amount borrowed) and interest.

Installment loans allow you to finance large purchases by spreading out payments over time. A big advantage is that with fixed payments, it can be easier to budget for the loan each month.

What is Revolving Credit?

Revolving credit is different from installment loans in that it allows you flexible borrowing up to a certain credit limit. Your payments and balance can fluctuate each month.

The most common type of revolving credit is credit cards. Here’s how they work:

• You’re approved for a credit card with a set credit limit (say $5,000).

• You can use the card to make purchases up to the $5,000 limit.

• You can pay off your balance in full or make a minimum payment each month.

• As you pay off your balance, your available credit is “replenished” so you can continue charging up to the limit.

• You can carry a balance month-to-month, accruing interest on the unpaid balance.

Other examples of revolving credit include home equity lines of credit (HELOCs) and some small business lines of credit.

The flexible nature of revolving credit allows you access to funds as needed. But borrowing too much can become expensive with interest charges.

Installment vs Revolving Credit: Key Differences

Now that we’ve explained both installment and revolving credit, let’s summarize some of the key differences:

Installment Loans	Revolving Credit
Borrow fixed amount upfront	Credit limit allows flexible borrowing
Fixed payment amounts	Minimum monthly payments, can fluctuate
Length and terms set when taking out loan	Can carry a balance month-to-month
Principal and interest in each payment	Interest charged on unpaid balances
Examples: Mortgages, auto loans, student loans	Examples: Credit cards, HELOCs

A couple major distinctions are that installment loans offer predictable payments and terms while revolving credit offers flexible access to funds.

Installment loans also tend to have lower interest rates compared to most revolving credit. But revolving credit doesn’t require locking in a lengthy financial commitment like installment loans do.

Are Student Loans Installment or Revolving?

Now to answer the main question: are student loans installment or revolving credit?

Federal and private student loans are considered installment loans. Here’s why:

• You borrow a fixed amount for the school year upfront, which is paid to your college.

• The loan has set repayment terms like length, interest rate, and monthly payment amount.

• Your monthly payments go towards both interest and principal.

• You repay the loan in fixed installments over a predetermined time period.

Student loans have definite payment amounts and terms, which makes them installment financing rather than revolving credit.

Private student loans function similarly to federal loans as installment loans. The main difference is that private lenders determine your loan amount, rates, and terms based on creditworthiness and other factors. Federal student loans have terms set by the government.

The bottom line: student loans allow you to borrow money upfront for college, which you slowly pay back in fixed installments over time. This makes them a form of installment credit, not revolving credit.

Pros and Cons of Student Loans as Installment Loans

Knowing that student loans are installment financing, what are some of the key pros and cons of this structure?

Pros

• Fixed monthly payments make budgeting predictable. You know exactly what to expect each month over the loan term.

• Spreading out payments over many years makes repayment more affordable, compared to paying tuition in one lump sum.

• Private student loan terms can sometimes be tailored to your financial situation, unlike one-size-fits-all federal loans.

• Having an installment loan can help build your credit history when payments are made responsibly.

Cons

• Long repayment periods mean you pay more interest costs over the life of the loan.

• Missing payments can damage your credit score.

• Loans with variable rates can have payments fluctuate over time.

• Refinancing or consolidating loans to adjust terms often involves fees.

• Some private lenders charge prepayment penalties for early payoff.

• Loan terms are locked in once set, with little flexibility to adjust later.

While installment loans help make education affordable, they also represent a long-term commitment. Make sure you borrow only what you need and can reasonably repay.

Other Ways to Pay for College

Student loans make college possible for millions each year. But they aren’t your only option for funding higher education. Here are a few other common ways to pay for college:

• Scholarships – Free money that doesn’t need to be repaid. Awarded based on merit, athletics, etc.

• Grants – Need-based aid that doesn’t require repayment. Awarded by federal and state governments and colleges.

• Work-study programs – Part-time campus jobs to earn money during school.

• Savings accounts – Building college savings over time allows you to avoid loans. But not realistic for all families.

• Parent PLUS loans – Federal loans parents can use to help cover college costs. Must be repaid.

• Employer tuition assistance – Some companies offer tuition benefits as part of job perks.

• Military and VA benefits – Programs like the GI Bill provide education benefits for veterans and families.

The best approach is exhausting free aid and savings first before turning to installment loans. Create a balanced plan that minimizes debt.

Final Thoughts

Figuring out how to pay for school is confusing, but installment loans like student loans provide an affordable way for millions to invest in higher education.

While installment loans allow you to spread payments out over time, it comes at the cost of interest charges. Make sure to only borrow what you genuinely need.

Student loans should be viewed as long-term commitments requiring responsible repayment over 5-10 years on average. With proper planning, installment student loans can provide access to life-changing educational opportunities.