Understanding Student Loans

According to recent reports by the Consumer Financial Protection Bureau, student loan debt is currently around $1.2 trillion. For many people, the decision to take on student loans is often the first major financial decision of their adult life. However, it is also a decision that can haunt us later in life. Students often struggle to understand the confusing financial documents given to them and have a difficult time finding helpful resources us navigate the student loan process. I know that my 18-year-old self definitely didn’t understand every aspect of the student loans I agreed to. So let’s start with the basics.

The Basics:

What’s the difference between federal loans and private loans?

Federal government loans almost always cost less and tend to have more flexible repayment options. Many federal student loans are subsidized and have fixed interest rates (more on interests later). Most students are eligible for these loans. The amount of money students can borrow is limited.

Private loans are usually done through private banks or lenders. Some schools and state agencies may offer these types of loans as well. You can borrow larger amounts than federal loans. Private student loans usually have higher costs and often require a co-signer. You are charged interest while attending school. Additionally, interest rates on private loans are often variable (more on this later) and repayment options are usually not flexible.

            Interest Rates

An interest rate is the cost of borrowing money. Interest rates are calculated as a percentage of the unpaid principal (the amount you borrowed). The total cost of your loan varies depending on the interest rate charged and the type of loan. The following are different types of interest characteristics that will effect how much your loan ultimately ends up costing:

  • Fixed interest rate: this is a set rate that will not change over the life of the loan. Generally, a fixed rate will be higher than a variable rate.
  • Variable interest rate: this is a rate that can change as interest rates in the market change. This means you may have a different interest rate on a monthly, quarterly, or annual basis.
  • Subsidized: The Government will pay the interest on your loans while you attend school. These loans are awarded based on financial need. You do not pay interest during the 6 months after graduation (the grace period) or during periods of deferment.
  • Unsubsidized: Interest starts to grow and is added to your principal (“accrue”) as soon as you receive the loan. You do not need to demonstrate financial need. You are responsible for all the interest on these loans during all time periods.

What is the best student loan for you?

There are many factors you should consider before deciding on what type of student loan to get. For example: Can you work during the school to cover some costs? Can you live at home? Do you think you may be able to pay the loan off quickly? Is one school offering me a better financial aid package? Below is a list of tips to help you make the best financial decisions regarding your student loans.

Strategies for building a strong financial future as a student:

  • Fill out a Free Application for Federal Student Aid (FAFSA). You must fill out this form to be eligible for any federal student loans. Since federal student loans are usually the best option for most students, you should explore your federal loan options first. Also, schools often use the FAFSA to award scholarships and grants, so fill it out even if you don’t think you’re eligible! Access the application here: https://fafsa.ed.gov/
  • Research free funds. Scholarships and grants are free money! These applications don’t usually take up much of your time and can really help you save money on education costs.
  • Negotiate for more aid.
    • Do not be afraid to talk about your accomplishments. I did this myself! It can be difficult to put yourself out there, but you should always be your own advocate! Even just a little extra financial aid can be the difference in being able to attend the program you want. You can email your financial aid office and ask to meet with a staff member to explain your position. You can also send a letter with the same information if a face-to-face meeting is uncomfortable.
    • Here is a helpful tool from the Consumer Financial Protection Bureau to compare your financial aid offers. You can use this information to help negotiate a better offer. http://www.consumerfinance.gov/paying-for-college/compare-financial-aid-and-college-cost/
  • Know what your financial situation will be.
    • Learn how to budget and be practical about what your costs will be. Getting informed now can save you from many headaches down the road.
  • Get good advice. Your community likely has free or low-cost financial counselors that can help you with the student loan process and other important financial decisions. Make use of these resources. Reach out to your school’s financial aid office if you have any questions. Talk to friends or family about their student loan experiences. The Consumer Financial Protection Bureau also has some great resources. http://www.consumerfinance.gov/paying-for-college/

Summary:

This information will hopefully help you understand and manage the student loan process. Student loans are not easy to understand, so take the time to learn as much about them as you can before making this important financial decision.

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