Managed properly, student loans can be a useful tool. Like any other implement though, one must be careful to employ it properly to get the most benefit. With that in mind, here’s what you need to know about student loans.
Loans Are Part of Financial Aid
Odds are, your financial aid package includes student loans. Read your package carefully to determine what portion of your assistance is comprised of grants and scholarships and what portion is made up of loans.
How Student Loans Work
Monies are forwarded to help offset the expenses you’ll encounter when you’re in school such as tuition, books, transportation, groceries, study abroad costs, personal supplies or off-campus housing. You’ll need to submit the Free Application for Student Aid (FAFSA) to apply.
It is important to note there are several different types of student loans, each with their own set of parameters regarding the way interest accrues and how repayment is conducted. Experts recommend getting federally backed student loans first, then opting for private loans if you need more money after your financial aid package is maxed out.
Types of Student Loans
Federal student loans come in two basic varieties; subsidized and unsubsidized. Your loan is usually subsidized if you’re receiving financial aid in the form of grants and scholarships. This means the government covers interest payments on the loan while you’re enrolled in school.
Any student can get an unsubsidized federal loan, regardless of whether or not they qualify for financial aid. The difference is you’ll be on your own as far as covering the interest payments are concerned, even while you’re in school.
Neither type of federal loan requires a prior credit history. Repayment plans are driven by your income and you can qualify for loan forgiveness under certain circumstances.
Banks and other financial institutions administer private student loans to help students supplement the monies they get from the federal government. While the requirements surrounding private loans tend to be a bit more stringent, organizations like Juno can help you get the lowest interest rates and the most favorable repayment terms.
Repaying Student Loans
A wide variety of repayment plans are offered, these include:
• Standard Plan – you’ll make monthly payment calculated to repay the loan in full within ten years.
• Income-Based – your monthly payment is determined by the amount of money you earn each month.
• Graduated Plan – monthly payments increase gradually over the 10-year period to give you an opportunity to get started in your career and pay more as you earn more.
• Extended Plan – stretches payments out over a period of 25 years, making the monthly payments lower — though you’ll ultimately pay more in interest.
• Pay as You Earn – extends the repayment period to 20 to 25 years, requiring 10 percent of your monthly income as payment.
• Income Contingent – requires low monthly payments over a period of 25 years, adjusted to low-income status.
Federal loans come with a six-month grace period post graduation to give you an opportunity to find employment. Some private loans do as well, but you need to make sure your lender does so.
Student Loan Forgiveness
Graduates can qualify for forgiveness of federal student loans within certain sets of parameters, chief among these is working as a teacher or in some other form of public service. However, loans can also be forgiven if your school closes before you earn your degree or if you become permanently disabled. Federal loans can also be forgiven if you die. In each instance, an application for forgiveness and proof of eligibility must be submitted.
It’s easy to see student loan money as free cash when you’re young and carefree. However, it will have to be repaid someday. When at all possible, you should avoid borrowing more than your anticipated starting salary. In fact, when it comes to what you need to know about student loans, this is perhaps the best advice of all. Managed properly, student loans are a good thing. They can help you create a better life for yourself by closing the gap between what school will cost and what you can afford to pay right now.