Student Loans
Education is important. Unfortunately, it’s also expensive. Most people can’t afford to pay the costs of higher education out of their savings or current income so they turn to student loans. Before you borrow, it’s important to understand how student loans work, and how to use them.
How Student Loans Work
Student loans are unique because they are designed for funding your higher education. What makes them different?
Benefits at payback time: Repayment is the worst part of any loan, but student loans can offer some borrower-friendly features that make it easier. Loans through government programs are the best, but some private lenders are willing to help as well. With some loans, you don’t have to start making payments until you’re out of school, and in some cases, your interest costs will be paid while you’re enrolled so your loan balance doesn't’ increase.
You might be able to stop making payments until you find a job, known as an unemployment deferment. The interest you pay on your loans might be tax deductible (check with your tax preparer). Finally, you might even get your loans forgiven or cancelled after 10 years of repayment, depending on your career.
Federal vs. Private Student Loans
You can borrow from any lender you want. However, loans offered through government programs such as the Stafford Loans are usually your best bet. Government loans are more likely to be generous with the benefits listed above.
Be sure to read your loan agreements carefully, and find out if you’ve got a variable rate loan.
How to Get Student Loans
To start borrowing, visit your financial aid office to start getting information. Find out what types of aid might be available, including grants and scholarships. Your next step is to fill out the FAFSA form, which gathers information about your finances (the government and your school use that information to determine your “need” for financial aid). Complete your FAFSA as soon as possible every calendar year. Do the best you can when filling it out; you can go back and correct any estimates later in the year.
Apply for aid with your school’s financial aid office, and wait for the results. If approved, you can decide to take all or part of the aid available, and you’ll probably need to complete a basic entrance counseling session to get educated on how your loans work.
If you’re getting private loans, you’ll need to find a lender and fill out a loan application with that lender.
Types of Student Loans
As you go through the application process, you’ll want to get familiar with the most common types of loans available through the US government.
- Stafford loans: Subsidized and unsubsidized loans are federal student loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. The U.S. Department of Education offers eligible students at participating schools Direct Subsidized Loans and Direct Unsubsidized Loans.
- Subsidized Loan: Subsidized Loans are available to undergraduate students with financial need. The U.S. Department of Education will pay the interest on a Direct Subsidized Loan while you’re in school at least half-time, for the first six months after you leave school; your grace period or during a period of deferment.
- Unsubsidized Loan: Direct Unsubsidized Loans are available to undergraduate and graduate students; there is no requirement to demonstrate financial need. The biggest difference between the subsidized loan and unsubsidized is when the interest begins to accumulate. Unlike the Subsidized Loan, you are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.
- PLUS loans are similar to standard loans. They require a credit review, and repayment starts soon after disbursement. In order to receive a PLUS loan, you must be a graduate or professional student enrolled at least half-time at an eligible school in a program leading to a graduate or professional degree or certificate, or be the parent (biological, adoptive, or in some cases, stepparent) of a dependent undergraduate student enrolled at least half-time at an eligible school;
- Consolidation loans are loans that combine multiple student loans into a single loan. The result is simpler repayment (one payment instead of many), and there may be other benefits. Consolidation works differently for federal and private loans. Learn the differences before you decide to consolidate or mix federal loans with private loans.