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How Do Undergraduate Student Loans Work?

by Josh Biggs in Finance on 18th August 2021

No one wants to be in debt, but graduation is sometimes more important. The thing about student loans is that not everyone understands how they can impact an individual’s plans and future goals or how they work. Look into the statistics of student loans in this link.

If you are about to graduate from secondary education, you may feel pressured by everyone to continue studying for the tertiary levels. However, no one will tell you how you can go about paying for your tuition, meals, and other expenses while you are in college. Its society expecting you to take out a massive loan if you are going to get that diploma.

This is why people have over $1.6 trillion of this debt crisis in the USA. Sometimes, others who have been there understand students who are in college. No one warned them about the dangers of these debts, and they did not get any advice on preparing for college in the right way. If you want to be ready, you should do some research first and make sure that you know what you are getting into before taking any money out.

About Student Loans

An undergraduate loan is money you borrow from private financial institutions or the federal government so you can pay for college. This is something that you need to pay back later and the interest that it builds up over time.

The money can be used to pay for books, room, board, tuition, and other expenses. However, some students may use the funds to make summer trips to Jamaica or an unforgettable spring break.

To be clear: A student loan is different from grants and scholarships. More about the scholarships here: https://money.howstuffworks.com/personal-finance/college-planning/financial-aid/scholarship.htm.  These debts always need to be paid back (unless you get lucky and get the borrowed money forgiven, which is a rarity). Grants and scholarships are not required to be paid back, and these debts are different from the work-study programs where many are getting paid while working inside the campus.

How Do these Debts Work?

Many people get federal aid by filling out an application form. Both parents and students may share their financial information on these forms, and they are then sent to the school of their choice. An office of financial assistance may crunch the numbers and figure out if a student qualifies. They will then send an award letter as well as other details about these offers.

It is worth noting that the aid may come in the form of scholarships or loans. Filling out the FAFSA or Free Application for Federal Student Aid ensures that you only accept free money because this is a no-loan zone. 

Many may borrow from private lenders. No matter how you are going about with your undergraduate student loans, you need to sign a promissory note, a legal document. As a student, you agree to repay the principal amount and the interest accrued over time. You also need to agree with the terms and conditions that come with these debts.

Types to Know About

There are two main types which are private and federal. Here are some things to know about federal loans. 

Direct Subsidized: These are the undergraduate loans ideal for students who genuinely need financial support based on the FAFSA. Once a student has left school or drops below a specific number, they can get a six-month grace period before the build-up of interest. The government will pay for the interest until such time that the borrower starts paying everything back.

Direct Unsubsidized: These are graduate or undergraduate loans where the students do not usually need to show that they have financial hardships. Most of the time, the government does not usually cover the interest, and the rate starts building once the money has been taken out.

Direct PLUS: These are the parents borrowing for their dependents. This may require credit checks and a separate application for FAFSA.

Private Lenders

Borrowing money from private lenders may be more expensive, and they typically have a higher interest rate than the federal loan. Students should start to make these monthly payments while they are still in school. The companies will decide the conditions, interest rates, and terms of the borrowed money, and the student may be responsible for all the interest accrued.

Categories: Finance