Financial Aid (Pt. 2): Student Loans

We're headed back now into the territory of financial aid just in time for back-to-school, this time to tackle the topic of student loans. If you're a young adult or entering into adulthood, you've definitely heard of the "dreaded student loan," but it doesn't have to be that painful as long as you have the information on your side.

This post is meant to assist prospective students in their search for methods of paying for college, but my hope is that all of the information provided here will also help those of us out there who are already doggy-paddling around in student loan debt.

So let's get right into it, by first addressing what loans are and the different types.

What kinds of loans are there?

There are three main types of loans for students and their families when looking for ways to fund a college education. A loan is an amount of money that the student/parent borrows from an institution, whether it's a bank, the government or a private company.

1. Federal loans - this is money borrowed from the U.S. government, specifically the Department of Education. They have two programs and several types of loans, based on the status and needs of the potential borrowers.
• William D. Ford Federal Direct Loan (Direct Loan) Program
• Direct subsidized loans - the money for this loan type is provided to students that demonstrate financial need, for example if their family is within a certain income bracket. If approved, you will receive a certain amount as specified by your school and the government will make the interest payments while: you're in school at least half time, for a grace period of 6 months following graduation, during a period of deferment.
• Direct unsubsidized loans - these are the same as the subsidized loans indicated above, however the applicant does not require any demonstrate any financial need and the government does not pay the interest.
• Direct PLUS loans - the main point regarding this loan is that it is aimed towards graduate and professional students or to the parents of a dependent child for whom the loan would apply. The applicant must have good credit and meet the general requirements for federal financial aid.
• Direct consolidation loans - this allows any borrower of multiple federal loans to combine them into one loan. The main benefit would be to pay one monthly installment as opposed to multiple, however this would extend the life of the loans and possible the interest, so you may end up paying more in the end over the life of the loan itself.
• Federal Perkins Loan Program
• These loans, more commonly referred to as Perkins Loans, are low-interest and provided to those who demonstrate "exceptional financial need." The money is issued through your school, who would be your lender in this case, and payments would be made directly to that school or the school's loan provider.
2. State loans - it's difficult to provide too much detail regarding state loans, as they vary among the states in the U.S. and have different requirements and specifications. The Department of Education has a search tool that allows you to find the contact information for your state.
3. Private loans - borrowing from a private institution is available to any student or parent, regardless of their financial situation. As such, the interest rates tend to be higher and the repayment may be stricter. It's important to do your research on the information and terms of the loans.
• You can receive a private student loan from banks and other financial institutions, private organizations or foundations, and some colleges offer financing, as well.
• Some popular private loan institutions are: Sallie Mae, Wells Fargo, Discover, etc.

Based on your, or your family's, financial situation, some loans are better options than others. I say this every time, but it's really important: do your research! The information provided above and in this article is meant to help in the original crazy search and help you to get your feet wet. I cannot express enough how you will also need to do additional work to look through the options.

Which loan is right for me?

Well, this is based on your financial needs and what you're looking for when borrowing money. Everyone comes from a different background and should keep that in mind when looking at loan options.

Tip #1: fill out the FAFSA!

• Do you require additional financial assistance? If so, check out the federal subsidized loans or Perkins loans to see if you qualify. These are great resources for anyone who may have otherwise not thought it possible to afford a college education.
• Are you in a position to borrow but don't qualify for the subsidized or Perkins loans? Your next bet would be either the federal unsubsidized, state or private loans.
• Are your parents or guardians thinking of taking out loans? The PLUS loan is a great option for them. They can also help by co-signing on private loans.
• Do you need to borrow money beyond the normal costs of tuition, room and board, or textbooks? Private loans do not have borrowing limits and allow the applicant to request the amount suitable to their request.

All of the options have their benefits or disadvantages, so let's go over some of the key points to keep in mind when researching your student loan.

What should I know about loans?

Just as with any other major decision, especially one related to finances, the terms are foreign and can be really confusing to the average person. Below are some of the points you should keep in mind during your research.

1. Interest rates - what is the average range for that type of loan? Are they variable? What would your interest rate look like based on your financial situation? Are the payments deferred during school? These are all questions you should address with your loan officer or bank representative.
2. Borrowing limits - do you have enough to cover the basic costs of college? Would you need to borrow additional money to cover any extra costs during the school year? Be sure to check that the loan you are choosing has a borrowing limit that works with your requirements.
3. Repayment - how many years do you have in the repayment plan? Does it begin after graduation or once the money is issued? Is interest paid off from the start or deferred? Are your monthly payments income-based?
• Repayment is a very important topic when borrowing, as the different student loan options may have varying requirements in regards to their repayment plans.
• Keep in mind that interest is being applied to your monthly payments at the rate established by the lender, or variable based on the market.
• The longer the plan is, the more that you will end up paying in the long-run due to the interest rate being applied.
4. Deferment - while payments are deferred, is interest accruing? Is the deferment based on graduation, number of credit hours or upon getting your first job? Normally, you won't have to start making payments until you graduate, however you will need to check that your loan is not accruing interest during this period of time.

Important: one fun fact that some people may not know is that student loans are tax deductible! When you or your parents/guardians are filing for your tax returns every April, be sure to keep your loan information handy for a possibly refund.

Final Notes

I think there should be some sort of plaque - the moment you apply for your first student loan, you get a golden cookie-shaped trophy and a letter welcoming you to adulthood. It's truly a subject that bonds many of us over beer/soda/mozzarella sticks anywhere across the U.S.

But, you can do it! We all have to go through it and, in my opinion, it's a great introduction into the world of financing. That being said, please be responsible and remember that student loans will be with you for a while.

Thank you and please let me know if you have any questions, tips or suggestions in the comments below or say hi to me on Twitter or Instagram!

Important terms

1. deferment - a postponement of payments or actions required until a further specified time.
2. co-signing - the ability for another person to be considered as a "back-up" in case you are not able to follow through with the payment or obligations required for the loan. This often will reduce the interest rate, if the other person signing is creditworthy.

References

U.S. Department of Education

CollegeBoard 1 | 2