Student loans can be a powerful tool for accessing higher education, but like any financial commitment, they require careful consideration. With the burden of student debt impacting individuals long after graduation, knowing the ins and outs before borrowing is crucial. As a prospective student, parent, or recent high school graduate, it’s essential to be well-informed about the complexities of student loans. This guide is designed to prepare you to make sound financial decisions that will shape your educational future.
Understanding the Types of Student Loans
Before diving into the borrowing process, it’s important to understand the different types of student loans available. Federal student loans are typically more favorable due to their fixed interest rates and flexible repayment terms. There are three main types of federal student loans:
- Direct Subsidized Loans: These loans are available to undergraduate students with financial need. The U.S. Department of Education pays the interest while you’re in school at least half-time, for the first six months after you leave school (referred to as a grace period), and during a period of deferment (a postponement of loan payments).
- Direct Unsubsidized Loans: These loans are available to undergraduate and graduate students and are not based on financial need. You are responsible for paying the interest on an unsubsidized loan from the time the loan is disbursed until it’s paid in full.
- Direct PLUS Loans: These loans are available to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.
Borrow Only What You Need
One of the most common mistakes students make is borrowing the maximum amount offered, instead of only what is needed to cover educational expenses. It’s important to calculate the true cost of attending college, which includes tuition, fees, room and board, books and supplies, transportation, and personal expenses. By budgeting and limiting borrowing to essential costs, you can avoid overextending yourself financially.
Understanding How Your Loan Works
To understand your student loan, you need to comprehend its terms and conditions. Key elements to focus on include:
- Interest Rate: This is the percentage at which interest is calculated on your loan. The rate can be fixed, meaning it stays the same over the life of the loan, or it can be variable, meaning it can change over time based on market conditions. For federal student loans, the interest rate is fixed and typically lower than rates offered by private lenders.
- Fees: Some loans include an origination fee, which is a one-time charge that a lender applies for processing a new loan. This fee is deducted from the loan proceeds, so you receive less money than you actually borrowed.
- Repayment Period: This is the amount of time you have to repay the loan. Federal student loans offer flexible repayment terms, which can range from 10 to 25 years, based on the specific repayment plan you choose.
- Grace Period: The grace period is a set period of time after you graduate, leave school, or drop below half-time enrollment before you must begin repayment on your loan. For most federal student loans, you do not need to make payments during the grace period.
By understanding these elements, you can predict the cost of your loan and make informed decisions about repayment.
What Your Loan Can Be Used For
Student loans are intended to cover the cost of higher education. This encompasses a variety of expenses, including tuition, room and board, and required supplies like textbooks. Loans should be used responsibly, and funds should not be diverted to non-educational expenses if it can be avoided. Always keep track of your spending and use the funds for their intended educational purposes.
Knowing Your Payment Options
When the time comes to repay your student loans, you’ll have several options. Federal loans offer a range of repayment plans suited to different financial situations, such as income-driven repayment, which caps your monthly payments at a percentage of your discretionary income. Standard repayment plans typically have a repayment term of 10 years, but you can also opt for extended plans that stretch it to up to 25 years.
It’s important to choose a plan that works best for you. For graduates facing financial hardship, deferment or forbearance might provide temporary relief. Additionally, consider options for loan forgiveness or discharge if you work in public service or experience certain life events.
Seek Financial Guidance
Student loans are likely the first significant financial decision many young adults make. Seeking counsel from financial advisors or resources provided by your educational institution will help demystify the process and provide you with the confidence to manage your educational financing.
By taking a thoughtful, knowledgeable approach to student loans, you are setting the stage for a financially successful future post-education. The key is preparation and understanding. Remember, the more you comprehend your options, the better you can control your financial destiny. Whether you’re just starting the application process or considering your repayment options, the knowledge you’ve gained will serve you well. Your education is an investment in yourself – ensure that you approach it as such.
Robert G. Gilliland, CRPC®Managing Director and Senior Wealth Advisor
Robert’s career has been a blend of high personal performance and team building. He earned a Bachelor’s degree in Finance from Stephen F. Austin State University. To pay for his schooling, he ran a franchise of restaurants, gaining experience in managing time, people and money that would serve him well in his later endeavors.
