Student Loans

Everything You Need to Know About Student Loans

When it comes to borrowing money to pay for college, students have a variety of resources available to them. There are government loan programs for students through the Department of Education. There are also more traditional resources like banks and credit unions. And then there are the “not-so-traditional” resources. In any case, a student needs to pay careful attention to the terms and conditions of the loan to insure their compatibility to the funding source and its repayment requirements.

US Department of Education loan programs

The federal government offers a few options for students who wish to borrow money for their education from them. Those programs are:

• Federal Perkins Loans – loan with 5% interest rate – Undergrads – up to $5,000/yr, Graduate & Professional – up to $8,000/yr – up to 10 years to repay
• William D. Ford Direct Stafford Loan – Subsidized - loan with 3.4% interest rate - $3,500 - $8,500 amount depending upon year in school – 10-25 years to repay – the US Department of Education pays the interest on the loan while the student is in school and student repays balance after graduation
• William D. Ford Direct Stafford Loan – Unsubsidized – loan with 6.8% interest rate - $5,500 - $20,500 amount depending upon year in school – Borrower pays interest on loan to US Department of Education while in school and repays balance after graduation
• Direct PLUS Loan – loan with 7.9% interest rate – pays for tuition for certain undergraduate and graduate students – Borrower pays interest to US Department of Education while in school and repays balance after graduation

Information on these loan programs can be accessed here.

The first step to being eligible for these loans is being enrolled in an approved university. Begin that process here.

Banks and Credit Unions

When borrowing money from a bank or credit union, the type of loan and the security on the loan play a big role in the interest rate and terms under which the loan will be made. Some banks and credit unions offer discounted interest rates for school loans, but the interest rate can change based on different indices affecting the cost of money.

Homeowners can often access Home Equity Lines of Credit (HELOC) which use the equity in their home as collateral for the loan. This type of loan can have a very low interest rate in some cases.

Credit Cards

Students have to make a conscious decision when it comes to charging college costs on a credit card. Some cards come out with “discounted” rates that can be very attractive, but caution must be used because the interest rate can skyrocket after the initial “special program” expires. Generally, credit cards aren’t going to be a good resource for funds, but with proper use and discipline, a credit card can help get a student through cash-poor times.

Other “non-traditional” resources

Finance companies frequently offer special deals for students with reduced interest rates and extended repayment terms. Again, caution must be exercised with respect to changing interest rates and repayment terms. Frequently, a missed payment or other slip up can result in an astronomical interest rate for the balance of the loan.

Special “student only” lenders can offer funds with favorable interest rates and repayment terms, but once again, the borrower must read all the fine print to make sure they aren’t opening up a Pandora’s box of problems should something go wrong further downstream.

School sponsored loans

In certain cases, students can borrow a part of the tuition from the school which they are attending. These arrangements generally cover only the cost of tuition and require the student to make a down-payment. Normally, the schools are using a third-party financing partner to provide the funding for the students, so the student is compelled to determine whether or not the terms and conditions for the loan are acceptable. In some situations, the school will extend the time over which tuition can be paid for a few months with a nominal fee.

Check with the experts before making a decision

Students are fortunate to have many resources available to them prior to making a commitment on a loan offer. Parents, friends, bank staff, and many others in a student’s personal network can help with the decision making. Time should be taken to analyze and review loan documents prior to signing.

It’s never a good idea to sign on the line without having first read through all the terms and conditions. And remember, if a particular term or condition doesn’t seem right, it can be removed or modified by adding a piece of paper to the package. Never accept a “standard contract” because no one’s life is ever standard. Read, consider and revise as necessary; otherwise, go loan shopping somewhere else.

Financial aid advisors at accredited universities can help you distinguish what the best type of loan is for you. Get in contact with an advisor today.