Over the past years holding a degree has become more of a necessity rather than a privilege. Higher education gives valuable knowledge and opens up better job perspectives for the graduates. However, the cost of college and university is expensive, and it keeps growing every year. After students graduate school, most of them don’t have enough savings or don’t earn enough (if at all) to pay for their higher education. That’s why they have to consider student loans. Before you decide to borrow money, it is important to figure out what is a student loan, how it works and how you should use it so as to not create yourself any problems with paying it off in future.
In this article, we answer the most common questions about student loans.
Before actually borrowing money for your higher education, you (or your parents) need to calculate how much money you will need to study in a college or university of your choice (including tuitions, fees, as well as other various expenses – for lodgings, food, books, car, health insurance, clothes, etc.). It’s important to be realistic, and cut off costs where possible: every extra dollar you borrow now might become a burden in the future when the time to pay off your loan comes. Secondly, you should look for ways to minimize your potential loan by applying for all available scholarships and grants and see if your family can help you with paying for your education. Next, once you know how much money you need to borrow, it’s time to choose the type of a loan (government or private) and apply for it by filling a FAFSA application (for federal loans) or a Promissory Note (for private bank loans). It’s also crucial to choose a potential lender wisely and learn everything about the interest rate for the money you borrow. Finally, you also need to inquire about various repayment plans and loan forgiveness, as well as learn whether student loans have any influence on taxes you have to pay.
And now let’s look into details of each step.
What Are the Student Loans and How Do They Work?
A student loan is a sum of money that you borrow to pay for your higher education and return this money in the future, mainly with an interest.
Quite often, loans can be a part of financial aid offered by your school. They come in the form of various scholarships and grants that you won’t have to repay. However, they are not always available. Thus most students have to borrow the money they need. Statistics speak for the huge popularity of student loans. Here are a few quick facts and figures:
- 70% of the US colleges are unaffordable for the majority of students, which makes them borrow money to pay for their higher education.
- 2 million of the US citizens currently have student loan debts.
- $1.48 trillion is the total amount of the national educational debt as of 2018.
- $39,400 is an average sum of loans graduates left their school with in
Designed to fund students’ higher education, loans have some unique traits:
- Considered by the government as low-risk type, student loans are generally charged lower costs. The interest on them is fixed, which means that students pay less over the years.
- Student loans are approved easier: as a student, you don’t need to have either a high credit history or a steady income. Sometimes, in case with the federal loans, your credit history doesn’t even have to be checked.
- While paying your student loan back, you can enjoy a few benefits. With some loans, it’s possible not to make any payments till the time of your graduation. In other cases, the cost of your interest will be paid for you, while you are still a student. The interest on your loaning might also get a tax deduction. In case you happen to be unemployed for some time after your graduation, you can get an unemployment deferment – or in other words, you’ll be allowed to stop paying your loan off until you get a job. In certain cases, you can even get loan forgiveness or cancellation.
How to Apply for Federal Student Loans?
A federal student loan is money that the government lends for your education. As mentioned above, government programs provide a lower interest rate and come with a number of benefits. That’s why they should be your first choice when searching for money to pay for your school. You should try your best to get as many federal loans as possible to cover your needs before you consider other possibilities.
The name Federal student loan applies to: direct subsidized loans, direct unsubsidized loans, direct PLUS loans (money offered to graduate and professional students by U.S. Department of Education), Perkins loans (this program is outdated since 2017), and direct consolidation loans (a program that combines all federal loans you’ve got into a single loan).
When applying to your potential school, you need to fill out Free Application for Federal Student Aid – FAFSA. Don’t forget that the deadlines for filling out FAFSA forms change every year. Generally, the program starts working a year before the next school year in fall. Independent students should use their own financial information, while dependent student should provide that of their guardians or parents.
A website of federal aid provides a tool called FAFSA4caster that predicts what contribution you may count on. To apply, you’ll need such documents as bank statements, employment info, pay stubs, as well as federal tax information.
If you are admitted to a governmental program, your new college or school will send you an offer for financial aid which also may include federal student loans.
How Do Private Student Loans Work?
After all, possibilities to be funded by the government are depleted, you may think of private loans to get more money if still needed. Banks, various credit unions or online lending companies are considered to be private lenders. Loans they offer can be marked as “student” or a standard type of loaning that one can use for any needs.
Private loans require a separate process of application. To compare various private loans before applying for any, you can use such sites as alltuition.com or finaid.org.
Before you receive a private loan you should:
- Meet a financial counselor (online or in person), to learn your responsibilities and rights as a potential borrower.
- Sign a Promissory Note – a legal document that lists all conditions and terms under which you will have to repay your loan. Make sure to keep a copy of this paper!
A few more things you need to know about private loans:
- Your loan may require a credit check and having a cosigner (a person who takes responsibility for you paying off the loan, as much as you take it; it might be your parent or your guardian).
- You may have to start paying off your loaning while still in school.
- The interest rate for private loans is generally higher than for federal loans; it also may not be fixed. Choose carefully and read all terms listed before you sign the papers. Also, interests may be not tax-deductible.
How Does Interest on Student Loans Work?
Interest is money that a borrower has to pay to the lender at a certain rate, in exchange for borrowing money. The rate of interest is calculated in the form of percentage from one’s unpaid (principal) amount of loan.
Federal student loans are available with the interest fixed. That means, the government sets interest rates and it won’t change drastically over the years. The interest on federal loans might also be subsidized (government refunds it). Interest for different types of federal loans may vary between 5.05 and 7.6%.
Private student loans generally have higher interest rates; they may vary (change over the term of the loan) or be fixed and are determined by each particular lender. Some interests may exceed 18%.
How Does Student Loan Forgiveness Work?
Loan forgiveness means that the whole sum or a part of a student’s loan should no longer be repaid.
The term “loan forgiveness” may also have such synonyms as discharge or cancellation (although all three terms are used to describe different situations).
Basically, “forgiveness” means that the borrower won’t require you to make further payments on your loan due to certain circumstances (your job, closure of your school or permanent disability).
Where to Get Student Loans?
As mentioned above, to borrow money for college, you can either apply for governmental programs (that come with a number of benefits such as federal interest refinancing or the possibility of loan forgiveness) or borrow money from a private lender (a bank, a credit union or an online lending company).
How Much Student Loan Can I Borrow?
The sum you can borrow depends on a number of factors. This is how much it counts.
Direct subsidized and unsubsidized loans – $5,500 to $12,500 per one year of education
Direct unsubsidized loans – maximum $20,500 per year
Direct PLUS loans – financial aid won’t cover the remaining cost of your education
The recommendation to all students considering any type of loans is not to borrow more than they actually need. The less money you borrow now – the less the burden of paying it off will be in your future. Do everything to start returning your loan as soon as possible: cut your expenses, be moderate, and find a part-time (or even a full-time) job, to be able to pay a part of your loan while you are still studying. Before you borrow, learn all possibilities and terms of repayments carefully, and make sure to keep all important documents.
By working hard as a student, you increase your chance of getting a great and highly-paid job, to not just pay off your student loan easily but also become a successful, independent person.