Understanding College Loans
If you are planning for college right now, you are probably caught between the exciting prospect of a 4-year adventure at your dream school and the hard reality that college is expensive. CollegeBoard reports that the average cost for tuition and board for a year at an in-state public college is a little over $20,000. For private 4-year institutions, you could be paying as much as $45,000 per year.
Another hard reality is that taking out student loans to pay these costs can have a big effect on your life after college. The Wall Street Journal reports that in 2015, students graduated with an average of $30,000 in accumulated college debt. That translates into a $333 monthly payment upon graduation. Most students assume it will take 10 years to repay their loans, yet research has shown that many borrowers take as long as 20 years to repay their debt.
The attitude of “I’ll just take out loans, everyone else does” can put you in that student debt trap. Loan companies, including the government, are making big bucks on the interest student borrowers are paying, and they make it oh-so-easy to take out these loans. Once you fill out the federal Free Application for Student Aid (FAFSA) and your Student Aid Report (SAR) comes to you from your prospective college, it can be really easy to click “Accept” next to those loan offers. Those loan disbursements can feel a bit like free money until you leave school and get that first payment bill in the mail.
While it may be easy to take out college loans, it is hard to navigate the complexity of the loan market. Loans come in several varieties: need based and non-need based, subsidized and unsubsidized, public and private, student and parent. Interest rates, repayment plans, and lenders all vary and can change without notice. So, get ready to make an informed decision about your college loans by understanding some basic vocabulary:
Federal Financial Aid:
The federal government helps organize the loan application process through the FAFSA (Free Application For Student Aid). Then, they let you know what kind of aid you qualify for through the SAR (Student Aid Report). Your aid “package” is the combination of different types of aid available to you based on your family’s financial need. That aid can come in three forms: grants, work study programs, or loans. Grants and work study programs are types of aid that don’t have to be repaid, so you can accept these without affecting your bottom line once you graduate.
Subsidized or Unsubsidized Federal Loans:
Not all types of government aid are cost-free. Your federal aid can also come in the form of subsidized or unsubsidized loans. This type of aid will have to be repaid after you leave school, even if you don’t graduate. Both types of loans also charge interest, meaning you’ll pay a certain percentage of total loan amount in order to use that money. If your loan offer is subsidized, it mean that the federal government will pay your interest while you are in school. Your loan amount doesn’t grow while you are taking classes. Once you leave school, you will take over the payment of the interest. If your loan offer is unsubsidized, however, it means that you are responsible for the interest on the loan from the date you get the money. The cost of that interest is added to the amount of the loan that you’ll start to pay when you leave school.
The federal aid package you are eligible for might not cover the cost of your school of choice. In that case, if you feel that school is worth the extra borrowing costs, you might consider private loans through a bank or credit union. The interest rate on these loans tends to be higher than the federal rate, which is usually around 4% for undergraduates. Take special care to understand the conditions of private loans. Interest rates and the repayment conditions can be very different than with federal loans.
Making a good decision about how to pay for your college is just as important as choosing the right college. So, do some homework now and make sure you understand how your college loans will affect your future!