WTFinance: Student Loans Explained

Truth is, there is a lot to be excited about when it comes to college: new friends, a new routine, (college parties!), and more independence. But along with all these perks, it’s also time to start thinking about your finances.

Whether you’re reaching your final year of high school or just planning your education ahead of time, it’s important to know your options.

College is expensive, but luckily there are a lot of available options to some financial help. You may be able to get a scholarship or grant, or you may have a small source of income if you work part-time. You also may need to borrow money throughout your collegiate years in the form of a loan.

The responsibility of taking out a loan may seem overwhelming, but understanding student loans and student loan terms before you borrow could prevent financial hardships and allow you to decide which loan options are best for you. If you’re thinking about student loans, here are some things you should know.

What is a Student Loan?

A student loan is money borrowed from the government or a private institution like a bank to help you pay for college. Loans provide students with funds that will cover most, if not all, college expenses depending on the type of loan you choose.

While a loan is a type of financial aid, a loan is much different than a scholarship or grant. The main difference is that it has to be repaid, while scholarships and grants do not. Loans are also not based on academic performance or athletic ability as some scholarships or grants tend to be. Rather, loans can be based simply on your credit score or your financial need.

While each student’s eligibility plays a huge role, most loans can be used to cover your educational expenses such as:

• Tuition
• Room and board
• Books and supplies
• Student service fees
• Miscellaneous costs (cell phone, child care, etc.)

These loans are offered and available to all students with financial need. Usually, the loan needs to be paid back once you’ve completed your education, though some private loans require payments while you are still in school.

What Types of Student Loans Are There?

There are two types of student loans: Federal and private. Both can cover your educational expenses but they differ greatly  when it comes to interest rates and repayment options.

Federal Student Loans

Federal student loans are loans financed by the government. There are three types of federal loans:

• Direct Subsidized Loans: These loans are given to students who demonstrate financial need determined by federal regulations. This is usually calculated by the difference between the cost of attendance (COA) at a school and your Expected Family Contribution (EFC). With this loan option, the U.S. Department of Education pays your interest while you’re attending school and for a six month grace period after you graduate.
• Direct Unsubsidized Loans: These loans are not based on financial need — they’re based on the cost of attendance for your particular school. Capitalized interest is applied to your loan, which in the end will increase the amount of your federal loan. However, students are responsible for repaying interest during all periods.
• Direct PLUS Loans: These loans are for the parents of a student. They can help pay for tuition and additional costs after all of your financial aid is exhausted.

To apply for federal loans, you need to fill out an online form called a Free Application for Federal Student Aid (FAFSA). This form will need to be filled out every year that you attend college in order to receive financial assistance. Once sent, you’ll receive a Student Aid Report (SAR) which will let you know what your eligibility is.

The colleges you’ve applied to will have your application information and once you’ve decided on a college, you’ll receive a Financial Award Letter, which spells out the details of your financial aid package. While each college is different, the same steps are required for each school.

FAFSA Requirements

While applying for a student federal loan is easy, there are certain requirements and criteria you must meet. In short, you must:

1. Be a U.S. Citizen or eligible noncitizen
2. Have a valid social security number
3. Demonstrate financial need for most programs
4. Maintain satisfactory academic progress in college
5. Have a high school diploma

Benefits of Federal Student Loans

There are many benefits to getting a student federal loan instead of a private loan. A student applying for a federal loan can do so on their own without the need of a parent or guardian.

• You don’t need a cosigner.
• Repayment plans are based on your salary or family income.
• You don’t need a credit history for this type of loan.

First time borrowers tend to lean towards federal loans because the interest rates are often lower than private loans and federal student loans may offer loan forgiveness. Each student and circumstance is different, so it’s best to look at all options before making a decision.

Private Student Loans 

Private student loans are offered by lenders like a local bank, national bank, credit union, or online lender. Interest rates vary from lender to lender, whereas federal loans are usually fixed rates. Keep in mind, you’ll also have to get a credit check before you apply.

A FAFSA is not needed to apply for a private student loan. You apply directly with the lender, either online or in person. They’ll provide you with a variety of options based on your specific needs.

Private Student Loan Requirements

Aside from having decent credit, there are other common requirements for a private student loan, though keep in mind lenders may vary.

1. Meet age, citizenship and education requirements.
2. Be enrolled in an eligible college or school.
3. Meet income and credit criteria.
4. Use the money specifically for educational expenses.
5. Need a creditworthy cosigner.

Benefits of Private Student Loans

As with federal student loans, there are many benefits to a private student loan. Some things to think about when choosing the best option for you include:

• While a cosigner is required, having one may increase your chances of approval and you’ll qualify for a better interest rate.
• You may be able to earn interest rate discounts if you have excellent credit score.
• This loan isn’t based according to your financial needs, so you may be able to get a higher loan amount.  

Commonly, students turn to private loans when they’ve maxed out federal student loans and need additional financing options. However, if you know you have excellent credit, it may be worth looking into a private loan first. Consult with a financial advisor to determine which option may be best for you.

Student Loan Repayment Plans 

While deciding which loan suits your needs, it’s also crucial to consider what repayment plan works best for you. There are differences in plans when it comes to private and federal. For example, federal loans often aren’t paid until after your grace period and upon graduation, whereas private loans often require payments to be made while you are still in school. Some federal loans also have options to tie your monthly payment to your post-graduation income. Mint’s loan repayment calculator can also help you create a strategy to get your student loans paid off.

Do Interest Rates Matter?

Yes! While reading through this article, you’ve noticed that interest rates will likely play a huge role in deciding which loan is best for you. Your interest rate is how much the lender charges you to borrow money. The higher the interest, the more you’ll pay in the end. In other words, what you borrow isn’t what you’ll pay back.

Student loan interests are presented as annual percentage rates. In federal loans, the government sets the interest rate each year. Private loan interest rates vary according to each lender but are usually based on financial market rates, such as those of the New York Stock Exchange.

How to Calculate Student Loan Interest Rates

Learning how to calculate your interest rate helps you see how much you are really paying in the end, so there are no surprises. The good news is, you don’t need to be a math whiz to do so.

Your interest rate on a student loan is your loan amount multiplied by the interest percentage. So let’s say you borrow $8,000 on a 4.5% interest.

$8,000 x 0.045 = $360

This means you can expect to pay $360 dollars a year in interest for an $8,000 loan. There are different formulas to calculate daily interest charges and monthly interest charges as well. It’s important to know what you are expected to pay so make sure you calculate and budget wisely.

Be On Top Of Your Student Loans

If this is your first loan, it’s common to feel worried or unsure about your choices. Even if you choose a loan that doesn’t require payment until years later, it’s still the perfect time to figure out when your first payment is, how you will manage your expenses, and exactly how much you will owe at the end.

Talk to other students, your parents, school counselors, and the financial aid office at your university. They can usually help shed some light on the experience of having student loan debt and how to manage this debt successfully..

Student loans don’t have to cause strain on your student life experiences. Being proactive about finding all the right information should lead you in the right direction and help you make the best choices for your education.

 

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