The Loan-Down on Student Loans

By Julia Dunn on July 1, 2015

“Student loans”: no two words any student or parent wants to think about. The mention of the phrase “student loans,” or worse, “student loan debt,” is enough to make anyone cringe in utter disgust and confusion.

Most of the scare-factor associated with student loans comes from a general state of misunderstanding (or lack of understanding at all) about the basics of college loans. How do they work? What do I do to get one? What are the differences between various types of student loans? What should I know before getting a loan?

Image Via: www.tuition.io

Read on for answers to the most fundamentally important questions about student loans and what they mean for you as a student. The more you know about managing loans, the less you’ll flip out at the mention of them.

Consider this your streamlined guide to student loans.

What is a student loan? How do they work?

As articulated by the Office of the U.S. Department of Education, which runs Federal Student Aid for the U.S., a student loan is simply money you borrow (typically for college) that you eventually have to pay back with interest. This means you have to pay back not only the exact amount of money that you borrowed in the first place, but also on top of that, you pay back a small percentage of it over time.

Certain loans have different interest rates; ideally, you want as low an interest rate as possible so that you don’t wind up paying a lot of extra money in interest when you’re already trying to pay back the loan amount you took out in the first place.

Why would someone take out a student loan?

When grants, scholarships, and out-of-pocket money don’t completely cover the cost of college expenses, students typically take out loans to cover the remainder of the cost. For some students, taking out student loans is the only way they can afford to go to college.

They are convenient for those who need up to thousands of dollars at a given time, but cannot supply the money on their own immediately; a loan is a commitment to eventually repay what you borrow in exchange for a lot of money in advance.

Image Via: www.ed.gov

What should I keep in mind when taking out a loan?

The following are critical to remember and hold clear in your mind when you take out a loan.

  • Who is taking out the loan? Who is lending the loan?

  • What are the terms and conditions of my loan?

  • What will my repayment strategy be later on when it comes time to repay what I owe?

  • Is my loan a federal/government loan or a private loan? What does this mean to me (jump a few paragraphs down to find out)?

It’s important to understand every signature and piece of information you agree to when signing up for a loan–of course, no one likes to read the terms and conditions (few of us really read them at all), but at the very least, just make an effort to understand the gist of what loan documents are telling you without reading word for word.

If you’re agreeing to pay back $30,000 later on in your life, you’ll really want that to be completely clear. You’ll sign what is called a promissory note, confirming that even if you don’t finish your college education, aren’t satisfied with your education, or if you can’t seem to find a job after graduating, you understand that you must pay back your loan regardless.

What’s the difference between a Federal Student Loan and a Private Student Loan? And what do they mean when they say my loan will be subsidized or unsubsidized?

Federal Student Loans are funded by the United States Government, and usually have lower interest rates as well as more flexible plans for repayment (for some federal loans, you don’t have to start making loan repayments until about 6 months after you graduate college).

If you’re having trouble making payments early on, federal student loans are most forgiving compared to others that may be private loans. Private loans are non-federal, and lenders of private loans can be banks, schools, or credit unions. Furthermore, some types of private loans require that you begin making payments while you’re still in school.

Subsidized loans are nice in that the government pays the interest on your loan as long as you’re in school on at least a part-time basis. With unsubsidized loans, however, you are solely responsible for paying back the interest on top of your loan.

I’m really scared about being in debt. What do I do?

Loans are investments in your education and future as a student. Even if taking out loans makes you nervous, the thought of getting a great education hopefully outweighs the fear and annoyance of student loans. While debt is not exactly ideal, it’s not the worst thing in the world. Money is money—you’ll pay it back eventually as though it were an extra bill like a phone or internet bill once you’ve got a stable job. It seems like a huge deal now, but it will seem more manageable the more you learn about the process.

Image Via: www.credible.com

Despite there being a lot of information in circulation about loans in college, student loans can be quite complicated and overwhelming; there’s lots to know beyond what is established in this article. If loans are still mystifying to you, refer to StudentLoans.gov for detailed explanations of more complicated loan situations and specific types of loans. For visual/auditory learners out there, check out these videos on the overview of the financial aid processmyths about financial aidbudgeting, and responsible borrowing.

As a starting point for anything financial-aid related, make sure you fill out a FAFSA (Free Application for Federal Student Aid) to see which types of loans and other financial assistance for which you qualify! And for specific loan scenarios, click here for tips on navigating matters such as how to make a loan payment, and what to do if you can’t afford your loan payments.

In the meantime, don’t stress about loans. Focus on making the best out of your college experience, and the money will work itself out later.

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