Understanding Student Loans

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Understanding Student Loans

It is no secret that college tuition, even at in-state public universities, continues to rise at a rate outpacing inflation.

Fortunately, students and their families can apply for a wide range of student loans. Like all loans, student loans will have to be paid back. However, these loans come with favorable terms, most notably low interest rates. Typically, students do not have to start paying back their student loans until several months after they've graduated.

Many times, those students who have not found a solid job after graduation or are having financial difficulties can often put off repaying these loans.

Before committing to any student loans, first understand the basics.

Types of Student Loans

There are two main types of student loans: federal and private.

Federal student loans -- including the common Stafford loan -- are a good option. That is because they tend to come with lower interest rates. Students do not have to repay these loans until after they graduate. In fact, federal student loans account for nearly 70 percent of all the student aid received by graduate and undergraduate students.

Federal student loans are handed out on a needs basis. In other words, students are more likely to receive federal student loans if they can demonstrate that they need financial assistance to afford the costs of college tuition and fees. However, federal student loans are limited. There is only so much assistance that students will get in the form of these loans. Again, this limit is based on students' financial needs.

A popular type of federal student loan, the Stafford loan, comes in two main types, subsidized and non-subsidized. With subsidized Stafford loans, the federal government pays the interest for students who attend classes at least on a half-time basis. This loan is given out on a needs basis.

With non-subsidized Stafford loans, students have to repay the interest. Also, interest can begin to accumulate before the student begins to repay the loan. This loan is not given out according to financial need.

Private loans are as the name suggests, provided by private institutions such as banks. These loans tend to come with higher interest rates. Some private loans also require that students begin repaying them before they graduate.

Private student loans can fill in the gaps left by federal student loans. They also often come with higher lending limits, meaning that students and their parents can borrow a larger amount of money to cover the costs of their college years.

Parent Loans

Parents can also take out federal student loans to help cover the costs of their children's college education. One popular vehicle for parents is the Federal Direct Parent PLUS Loan.

With these loans, parents can cover up to the total cost of their dependent children's college education minus whatever additional financial aid they or their children have already received. As an example, if the annual cost of attendance is $25,000, and the student receives $5,000 in student financial aid, the Parent PLUS Loan program can provide parents up to $20,000 in loans.

Parents, of course, can also take out private student loans to cover their children's education costs. Again, these loans might come with higher lending limits, but they also usually come with higher interest rates, too.

Paying it Back

Be aware that student loans require repayment. There are several ways to help reduce the amount of money taken out in student loans. Seeking out scholarships, attending a community college for two years, or choosing an in-state school versus a private institution.

The best plan is to research financial aid opportunities carefully. That is the best way to minimize student loan debt.

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