Understanding Student Loans

You paid for the college prep classes. You paid for the applications. You even paid for the college hoodie. Now the question is, how are you paying the tuition?

No matter if it’s in-state or not, tuition has become hard to figure out how you are going to pay it. However, one thing almost every college does, aside from overcharging you for that hoodie, is offer student loans. Sure, you have to pay it back. But usually that doesn’t happen until a few months after your kid graduates. And if they haven’t found a job or can’t quite pay it back, you can most times arrange to pay it a little later. There are a few things you should know about student loans that could help you navigate some of the expenses and maybe save you some money.

Types of Student Loans

There are two main types of student loans: federal and private. Federal student loans are a better option. Why, you ask? Good question. They come with lower interest rates, for one. Students do not have to repay these loans until after they graduate. 70% of student loans are federal.

They’re also handed out on a needs basis. If you can demonstrate you need financial assistance, you have a better chance. The downside is that there are only so many federal student loans to go around. It comes down to who needs it most.

A popular type of federal student loan, the Stafford loan, comes in two types — subsidized and non-subsidized. Subsidized means the federal government pays the interest for students who attend classes at least on a half-time basis. With non-subsidized, you have to repay the interest. Unlike subsidized, this loan is not given out according to financial need.

Then there are private loans provided by private institutions like banks. These loans often come with higher interest rates — so not as beneficial as federal loans. Even less attractive is that students have to begin repaying the loan before they graduate. On the upside, you can often borrow larger amounts than federal loans to cover more of your college expenses.

Parent Loans

Parents can also take out federal student loans like the Federal Direct Parent PLUS Loan. These loans allow parents to 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. So, 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 with up to $20,000 in loans. They can also take out private student loans to cover their children’s education costs with the same rules as above.

Bottom Line

Obviously, a student loan is a debt. And like any other debt, it requires being paid — preferably promptly. So, the two best courses of action are making sure students understand the responsibility that comes with debt. And then doing what it takes to acquire as little as possible. Remember, there are many scholarships out there that you may be able to get with some extra research. Maybe it’s worth considering a community college for a couple of years. In-state tuition is always something to consider as well. But at the very least, research financial aid carefully and find out what works for you. And then you can be ok getting that hoodie.