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Understanding Student Loans

By Edited Mar 14, 2016 0 0
Understanding Student Loans
Credit: lumaxart

Why Finance Your Education?

College and graduate schools are incredibly expensive and most students (or their parents) do not have the adequate funds to pay for higher education.  As a result, most people turn to student loans in order to pay for tuition, books, and living expenses at college or for graduate school. 
 
The Federal Government will directly lend to students and parents of prospective students the funds to pay for school.  Financing for school can also be obtained directly from many schools or through private lenders.  Most students pay for school with a mix of loans from the government, their school, and private lenders.  Additionally, many students are able to subsidize some of the costs through scholarships, grants, and jobs.

What to Look for in a Student Loan

If you are looking to to pay for your education by borrowing from a lender, you want to make sure to get the best (that means the lowest) interest rates on your loans.  Before committing to any loan, be sure to compare the interest rates offered to you by different lenders and for different types of loans.  The goal is to get the most money at the lowest rates possible and if you are forced to take out money at higher interest rates, to take out as little as possible at the lower rates.  You should also look into the different incentives of deductions to interest rates that are offered by different lenders for different types of loans.  Some lenders will offer interest rate deductions for paying the money back via automatic withdrawal from your bank account or after making a certain number of consecutive on time payments.

Types of Student Loans

There are various types of student loans that you can consider at different rates.  Below is a list of the various ways to finance your education and an explanation of their interest rates.

Stafford Loans
Stafford loans are provided by the Federal Government and their interest rate is always fixed (meaning it does not change and is what it is) and it is determined by Congress.  The government offers both both subsidized and unsubsidized loans.  For those that are subsidized, the government pays the interest while you are school.  Therefore, the balance when you graduate is the same amount of money you borrowed.  However, on those that are unsubsidized, the interest accrues while you are in school and the balance upon graduation will be more than you borrowed initially.  If you can make any payments towards your unsubsidized debt while in school you should consider it so that you don't graduate with student debt that has ballooned into something unmanageable.
 
There are caps on how much you can borrow in subsidized and unsubsidized Stafford loans annually.   As previously stated, the rate for subsidized and unsubsidized Stafford loans is determined by Congress and may differ depending upon the year of school, what types of school (undergraduate v. graduate), and whether the loan is subsidized or unsubsidized. For many years the rate was traditionally 6.8% across the board.  However, with recent political pressure to relieve students of crippling student debt, the current interest rate for all Stafford loans disbursed after 7/1/2014 is 4.66%.

PLUS Loans
PLUS loans are another type of student loan offered by the Federal Government.  Unlike the Stafford loans, there is no cap on how much money you can borrow in PLUS loans.  They used to be exclusively offered to parents, but now students may take out PLUS loans as well. The interest rates on PLUS loans are fixed and determined by Congress. For many years the rates was 7.9%; however, the interest rate for money borrowed after 7/1/2014 is 7.21%.

Perkins Loans
Federal Perkins loans are available to undergraduate, graduate, and professional students with exceptional financial need.  The school is the lender to the students and therefore, Perkins loans are not available at all schools.  Funds depend on your financial need and the availability of funds at your school. undergraduate, graduate, and professional students with exceptional financial need. undergraduate, graduate, and professional students with exceptional financial need.  If you are an undergraduate student, you may be eligible to receive up to $5,500 a year. The total you can borrow as an undergraduate is $27,500.  If you are a graduate or professional student, you may be eligible to receive up to $8,000 per year. The total you can borrow as a graduate student is $60,000, which includes amounts borrowed as an undergraduate.  The interest rate is set at 5% and not subject to any interest rate deductions.

Private Loans
Another way to pay for your education is through private loans.  Private loan rates are set by the banks that lend the money to students.  These interest rates are typically variable and change and vary depending upon the current rate for either LIBOR or Prime.  Private loan rates are available online at Finaid.org and Bankrate.com. 

Consolidating Student Debt

Student Loan Consolidation
If you have excessive student debt, one thing to consider is consolidating your student loans.  Through consolidation, you can lock in an interest rate (if it would otherwise be variable) and extend the length of time you have to pay back your loans.  By extending the period of time you have to pay back your debt (typically from 10 years to 25 years), you will lower your monthly payments, which may come in handy when just getting out of school if you have a low paying job and cannot afford the monthly payments.  Only federal student loans are eligible for consolidation.

Paying Off Student Debt

Now that you have learned about the different types of student loans and you understand them so that you can finance your education, you next step should be to look into managing your student loans by not getting buried by student debt and paying off your student loans as soon as possible.

Student Loan Debt 101: The Definitive Guide to Understanding and Managing Your Student Loans
Amazon Price: Buy Now
(price as of Mar 14, 2016)
An e-book of even more tips and tricks for understanding and managing the debt your incurred paying for your education.
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