Student Loans Explained
Many pursuing a college career find it necessary to take out student loans. However, loans for college students are not as cut and dry as your regular bank loan. Unlike other forms of financial aid like grants or scholarships, student loans have to be paid back at some point. Not only does the total amount borrowed need to be repaid, but it will also need to be repaid with interest. If you don’t know what you are doing, this can be dangerous ground to tread. Just think about it: you will owe your school or lender money for several years after your college education is completed. This can be a scary thought, especially if you are unsure of how the whole student loan process works.
Right about now you may be considering casting aside the whole idea of getting a loan all together. You may be thinking, “But I’ve qualified for a grant! Why do I need a loan?”
Simply put, college is an expensive investment. And while a grant may pay your tuition (if you’re lucky) you still have many other expenses to think of like books, dorm costs, living expenses and, let’s not forget, cash for the occasional meal with friends. A whopping 65% of 4-year undergrads borrow money according to the National Postsecondary Student Aid Study (NPSAS). With that figure, loans are definitely a part of the college plan.
In order to have a somewhat comfortable college experience, you will need money and many students find student loans the answer to their cash flow woes. However, as a footnote to this, you shouldn’t rely on student loans to pay your everyday bills or to go on a shopping spree. A part-time job may be in order to keep on top of your bills.
Even so, sometimes loans are just a necessity. In order to gain an understanding of the student loan process, it is important to briefly discuss the main types of loans available to students—or their parents—to help finance a college education.
Types of Student Loans
The main categories of student loans are federal student loans, private student loans, bad credit student loans, consolidation loans and alternative loans. These may seem like pretty vague categories, however, let’s discuss them a bit more in detail.
Federal Student Loans
Federal student loans are essentially loans that are funded by the government. These student loans have many benefits attached to them, including low interest rates, lowered fees and lenient payback policies. Stafford loans, Perkins loans, and Sallie Mae student loans are all examples of federally guaranteed loans. Unlike standard loans you could get from your bank, federal student loans have flexible repayment loans that make affording college a much more feasible task, especially since you will more than likely not have to pay back a cent until you are finished with school.
Private Student Loans
Private student loans are offered by companies that have no federal ties. Unlike the federal loans, which are guaranteed to a certain extent so long as you meet the minimum requirements, private loans are most often based on your (or your parent’s) credit score. Private loans, such as those provided by Bank of America, Wells Fargo or Chase, fill in the gap between the amount received from federal loans, grants and other forms of financial aid. College is expensive and private loans help to make it affordable.
Bad Credit Student Loans
Bad credit student loans make college “doable” for even those with less than stellar credit scores. Let’s say you didn’t quite qualify for a federal loan and the private loan companies are turning you down left and right. What do you do then? You can still get a loan! 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 another option for students wishing to lower their bills and pay off their loans quicker. It works basically by combining all of your loan bills so you can pay them off in one single payment. You will usually find that this payment has lower interest as well. Student loan discounts are another means of keeping your loan payments on the low side. Lenders often offer student loan discounts in hopes of encouraging people to borrow from them.
Alternative Student Loans
Alternative student loans are sometimes alternatively called private student loans, however, we are referring specifically to 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, as it is a loan that is offered to parents of students. The parents are then responsible for paying back the loan. Likewise, the flexible repayment plan options that typically correlate with student loans do not apply here. Graduate student loans are another example of loans that do not fit within the confines of the above categories. They are for students pursuing a post-baccalaureate degree that require additional financing for their education expenses.
Institutional Student Loans
With this type of loan, your college will be the lender. Most schools offer institutional loans but interest rates and terms will vary from colleges. Once you are admitted, check your financial aid department to see if they offer this program and if you qualify. The loan can be paid electronically via your savings and checking account. You are also entitled to thousands of dollas worth of saving on interest if you pay on time.
Making the Most of Your Student Loans
Student loans, as you know by now, are not cut and dried. They are quite complicated and require a good understanding of the types available in order to make the best decision for your college career.
Along with these loan categories, there are also various programs and items you should be aware of before signing your name on the dotted line. Loan forgiveness programs, for instance, are an option for people very deeply in debt. These programs work by taking away all of your debt in exchange for working in a volunteer program or signing up for military service.
Of course, making timely payments are extremely important. Failing to do so can result in a default on your student loan, which is a very serious problem with long-term affects.
In order to prevent a default on your loan, you should have a solid idea of how much you will need to pay back, including interest. There are many calculators online that make the task of figuring out your total loan repayment responsibility easily.
Also, be sure to note that on your taxes, you can deduct up to $2,500 in interest from your student loans. Breaks like this are important to remember. With a hefty student loan debt, you’ll want to save money any chance you can.
Things to Remember
If you remember anything before selecting a student loan, try to keep the following in mind:
- Do as much as you can without a loan. Relying solely on loans to pay for your college tuition will result in very large repayments come graduation time. Apply for grants and scholarships like your life depended on it.
- Don’t forget your savings! Getting a student loan and then using money you earn just for fun things is not all together responsible. Make sure a portion of your income is funding your college education as well.
- Read the fine print. You will be bound to this loan for several years. Make sure the terms are suitable to you and your lifestyle.
- Don’t skip a payment. If you are finding yourself running short money one month, can’t find a job after graduation or what have you, don’t just let the payment pass you by. Call the lender. Talk to them. Remaining silent can result in a default on your loan, which as mentioned previously, has serious consequences.