With the costs of a college education having risen dramatically over the last forty years, more and more students are turning to student loans to finance their higher education. Even state collages are now more expensive than they have been, and whether you are interested in a four year institution or you have dreams of a doctorate, funding is one thing that you need to consider. Learn more about student loans and consider what they can mean for you.
What is a Student Loan?
At the most basic level, a student loan is a sum of money that you will use to further your education. It might be presented to you in a lump sum, or it might be paid out over the course of a set period of time. A student loan will need to be paid back, though the terms of that repayment will vary depending on the type of loan that you apply for and the conditions that you choose.The principle is the amount of money that you are borrowing. This number does not shift. It is important to remember that the money that you need to pay back will be larger than the principal. The interest is the money that accrues on top of the principal that you owe. The interest is essentially the fee that you need to pay for using the money that you were given.Types of Student Loans
Student loans are typically split into two categories. Federal student loans are provided by the federal government, and in general, they are considered preferable. If you take out a student loan, you will not need to pay it back until you are done with school, neither a credit check nor a cosigner are required, and in some cases, you can receive a subsidized loan, where the government pays for the interest on the loan as long as you are in school at least half time. On top of that, the interest rate on a federal student loan is fixed. That means that you will be able to reliably calculate how much you owe over the course of a loan’s lifetime.A private student loan, on the other hand, is a loan that is offered by a bank or other private lender. They can be easier to get than a federal student loan, but some require you to begin payments before you are out of school, the interest rates are typically much higher, and a cosigner is typically required. Unlike a federal student loan, private student loans have variable interest rates, which mean that you could end up paying more (and in some cases, much more) than what you had planned on. There are people who choose to use private student loans, but they require a fair amount of aggressive management to make sure that you are making the right decisions. There are fewer federal loan options than there once were, and that has led to more and more people deciding that they will opt for private student loans.How Interest Rates Work
As discussed above, interest is the fee that you will pay to use the principle of your student loan. Instead of being a flat fee, interest instead expressed as a percentage of the principle, known as the interest rate. The interest rate is accrued over the space of a year. For example, as long as you owe money on the loan, the interest rate is calculated from the amount left unpaid. A loan of 50,000 dollars with a 2 percent annual interest rate would mean that by the end of the year, you would owe 51,000 dollars.
As you can quickly see, the lower an interest rate you have on your loan, the better. When you are looking at federal student loans, the interest rates typically range from between 3 and 6 percent though some loans that are offered to graduate students, are much higher.
Fees, and How to Avoid Them
Student loan fees come in a few different types. For example, the most common student loan fee is a processing fee that is levied by the lender. This fee is removed from the money that you receive in order to cover processing costs. This means that though you are still liable for the money that you borrow, you will not see a certain amount of it. Depending on what loan you have chosen, the fees will vary. Most loan fees are around 1 percent of the principle amount.
Other fees are issued when your loan payments are late. In addition to other possible consequences, like interest capitalization, you will also find that being late on your payments can have a serious affect on the money that you owe.
There is nothing to be done about the processing fees; these fees are part and parcel of receiving a federal loan. However, to avoid other unnecessary fees, be willing to read your policy closely and to ask plenty of questions. Make sure that you know how much money is due every month and when you need to start paying. This is a good way to make sure that you stay on top of your student loan payments. Remember that simply being unaware of when you needed to pay and how much you need to pay is not going to get you out of late fees.
Another thing that you can do when you want to avoid fees is to make sure that all of your costs are itemized. There will be a sum that you have to pay every month, so make sure that you know what that sum covers. What are you paying for? Some fees can be negotiated, especially when you are dealing with a private lender.
Interest Capitalization
A capitalized interest policy is essentially a policy that states that any unpaid interest that you have on your loan will be rolled over onto the principle amount of the loan. This means that the amount of interest that you have to pay is higher, and that the monthly amount that you owe will generally go up. This increases the amount of money that you will pay over the lifetime of the loan, and if it is a regular occurrence, the amount of money that you owe can skyrocket.
This is one reason why subsidized loans are seen as being an advantage; you will not be putting more money into the principle that you owe without a job to pay for it.
Before you sign any loan agreement, be willing to talk to the loan officer about capitalized interest and what it could mean to you. Most loans have a capitalization policy, but they will vary one when that is going to begin.
It is also worth noting that capitalized interest is tax deductible, something to consider when tax season rolls around. It may not save you a lot of money, but it will save you some.
Choosing the Best Loan For You
Before you do anything with loans, make sure that you fill out your FAFSA. This document will help you figure out how much aid you might qualify for, and when you have that figure in hand, the amount of money that you need to pay to attend college might be much lower than you thought.
You should also look around at aid packages that are offered by your college or university. There are work study programs that can help you defray the costs of school, and in some cases, enrollment in these programs can make your chances for getting a federal loan a little bit better.
After that, start taking a look at the money that you will need to complete your education. Across the board, it is best to choose the smallest loan possible. Think about whether you will be able to work while you are in school; if you can hold down a job while attending college, you can defray your costs. However, if you are in a demanding course, this can be impossible.
Also think about housing. Student loans will cover housing and food, but it is in your best interest if they do not have to. Living in a dormitory is far more expensive than living off campus, so be willing to explore your housing options. Part of good loan acquisition is knowing what your own financial state is going to be and how much you need.
In general, the best loans that you can find are federal loans. Start applying for these loans early, and do not attempt to look for private loans until the federal loans have been exhausted. In general, private students loans are always available, so you do not have to worry about missing out.
If you find yourself in a situation where you need to look into private loans, research them aggressively and make sure that you know what you will actually be paying. Do not only look at the amount that the lender is willing to offer you. Make sure that you look for the capitalization policy as well as the interest rates. Though private loans with a fixed interest rate are rarer, they are out there. Choose a loan with the lowest interest rate possible.
Questions to Ask Before Borrowing
When you are looking at making sure that the loan you choose is the best one for you, there are a few questions to ask.
Is this loan subsidized?
A subsidized loan, in the long run, will cost you far less money than one that is not. Many federal student loans are subsidized, but virtually no private loans are. If a loan is subsidized, it is typically a good choice for you.
What late fees are involved?
Everyone has bad months, and there are many people who will fall behind on their loan payments. However, depending on the policy that is involved, falling behind might be a simple mistake that is easy to rectify or it might be a serious issue that will cost you hundreds of dollars. Make sure that you know what needs to be paid if a late payment is made.
Tell me about the interest rate.
If at all possible, you want a low, fixed interest rate. We’ve talked about the wide range of interest rates above, so make sure that you get as much information on the interest rate as you can. The more you know about what you need to pay, the better. This is a good way to make sure that you know what kind of payments you are looking at when you leave school.
Can I prepay?
Prepaying a loan means that you will pay more than you need to. If you have some spare money, prepayment is a way for you to pay off the loan more quickly and to reduce the amount of interest that is accruing on your loan. While you can always pay a federal loan early, there are more regulations involved with private student loans. Make sure that you will not be penalized if you want to pay off chunks of your loan sooner than they might prefer.
When do I start payments?
Nearly all federal loans do not require you to start payment until you are done with school. Most private loans require payment before you graduate. Make sure that you know when you need to start your payment.
When can I defer my loan?
A deferred loan is one where you do not need to make payments on the loan for a certain amount of time. When you have borrowed money from a federal lender, you will be able to defer your student loans if you go back to school, if you are experiencing a period of unemployment, and if you are actively enlisted and serving in the armed forces. You may also receive a forbearance, where your loan payments are reduced for a period of time. Private lenders have different rules, so make sure that you know what they are. For private lenders, forbearance tends to be more common than deferrals. When you look into the rules regulating forbearance and deferral, you are looking at your escape routes if your life takes an unexpected turn.
Getting a college education is an enormous accomplishment, but it is certainly not free. When you want to fund your higher education, student loans can play an enormous role in how you move forward. However, it is important for you to remember that not all student loans are created equal. Make sure that you know what you are paying for and what you will need to pay back in the not so distant future. The more you know about your student loan situation, the happier and more secure you will be.
At this point, the prospective college student needs to plan for what they are doing after college as well as what classes they are going to take, so be prepared!
