Student Loans Explained

What You Need to Know About Borrowing and Repaying for College

Most college students borrow money, or take out student loans, from a number of sources. Unlike free forms of financial aid, like grants or scholarships, student loans have to be repaid at some point. Not only does the total amount borrowed need to be repaid, but it also must be repaid with interest. Typically college graduates spend 10 or more years repaying student loans.

College is without a doubt one of the most expensive investments you’ll ever make in your lifetime. According to the National Postsecondary Student Aid Study (NPSAS), 65% of four-year undergraduate students take out student loans to help them pay for college.

Guess what? Student loans are not exclusive to undergrads. In fact parents have student loan options and grad students require even more financial leverage than undergrads.

Types of Student Loans

Student loans commonly include federal student loans, private student loans, loans for students with bad or poor credit, student consolidation loans and alternative loans.

Federal Student Loans

The Federal Family Education Loan Program (FFELP) is designed to provide American college students and their families with additional financial aid funded by the federal government. Federal student loans include Stafford Loans, Perkins Loans, and the Federal Consolidation Loan. Students are automatically considered for them when they file the annual FAFSA. The Stafford Loan comes in two versions: subsidized and unsubsidized and is the single most used student loan; almost every student qualifies for some kind of financial aid through the Stafford Loan program.

Benefits of federal student loans include low interest rates, lowered fees and lenient payback policies. Unlike standard loans from your bank, federal student loans have flexible repayment terms that make paying for college a much more manageable reality. Federal loans are not required to be repaid until after you’ve graduated.

Private Student Loans

Private student loans, such as those offered by Bank of America, Wells Fargo or Chase, are designed to fill the gap between the amount received from federal loans, grants and other forms of financial aid. However, private loans require the borrower or co-borrower to have good credit and often come bundled with high interest rates and extra fees. For this reason federal student loans are always to be considered first. Used appropriately, private student loans can help students pay for extra educational costs, such as textbooks, computers, even room and board and transportation.

Bad Credit Student Loans

Loans for students with bad or poor credit are more possible than you may think. For example, most federal loans require no credit check—you can have no credit or bad credit and still be approved for federal funds. But other types of loans can help you circumnavigate bad credit, as well: fast student loans, no credit check student loans and direct student loans all provide great options for students wishing to get ahead but don’t quite have the credit to back up their goals.

Student Loan Consolidation

Consolidating student loans is an option typically reserved for students with multiple and high monthly repayments. The programs have become so popular a way to ensure that grads avoid default that the Federal Family Education Loan Program (FFELP) includes a federal consolidation loan. But many private lenders also offer private student loan consolidations as well. Before you default on student loan repayments, find out if you are a candidate for student loan consolidation.

Alternative Student Loans

Alternative student loans include private student loans, as well as those loans that do not fit into the other broad categories. For instance, a Parent Loan for Undergraduate Students, or PLUS Loans, would fit into this category. PLUS loans are offered specifically to parents of students. Graduate student loans are another example of loans that do not fit the above categories. They are for students pursuing post-baccalaureate degrees that require additional financing for their education expenses.

Institutional Student Loans

Many colleges and universities offer institutional student loans, but interest rates and terms vary. Ask your financial aid department about any campus-specific loans they offer and what benefits are attached.

Managing Your Student Loans

There are a number of sound financial management options you should know about when repaying your student loans:

  • Consider the advantages of loan forgiveness programs. These types of programs may be available to nursing students, med students and students willing to enroll in the military. Essentially you agree to work or serve for a period of time in exchange for all or partial loan forgiveness.
  • Make on-time student loan repayments a regular habit. In some cases lenders may reduce interest fees for so many consecutive on-time payments. If you find yourself consistently delinquent, consider a student consolidation loan program. Default should never be an option.
  • Manage your loan repayment using online calculators. Find out quickly and easily how to figure your total loan repayment including interest.
  • The federal government allows a couple of important tax credits: the student loan interest deduction and the Hope Scholarship Credit. Make these important deductions a regular part of your annual tax preparation.

Student Loan Tips:

  • Supplement student loans with other financial options, such as savings and free aid. Make sure to begin a college savings plan as soon as possible. Use this to pay for whatever you can. Most 529 savings plans allow you to save tax-free money, some states even provide monetary incentive/gifts and many employers do, as well. Apply for grants and scholarships.
  • Understand all the details and terms of all your federal and private student loans. You will be bound to this loan for several years.
  • Don’t miss payments. If you are consistently running short on money each month, call your student loan lender. Talk to them. Once you default it is much more difficult qualifying for a consolidation loan. Student loan default can have serious consequences and ruin your credit rating.