Student Loans 101

Filed Under Student Loans and Financial Aid

Understanding student loans is almost a part-time job. There are lots of twists and turns to wrap your head around and it takes time to fully understand the rules and regulations. So if you’re a parent about to send your suddenly grown up boy or girl off to college, you need to prepare yourself for a little bit of research.

In the first place, a student loan is usually just one part of a complete financial aid package. That package usually consists of some combination of scholarships, grants, and loans – with some other aid available through work-study programs and tuition waivers. Scholarships and grants don’t have to be paid back but student loans do.

When someone refers to college student loans they usually mean federally funded loans. Most of the financial aid available to students comes from or through the federal government – individual lenders may participate but the process is controlled by the Feds. There are also private student loans available directly through banks and credit unions.

Federal student loans are backed by the government. That means the government either directly or indirectly guarantees repayment. This allows any lending institution that wants to participate in a particular program the ability to offer lower rates in comparison to other types of loans. They know that is a student loan default were to occur, the government would cover their loss.

These low interest student loans themselves fall into two broad categories, namely subsidized or unsubsidized. Both types of loans accrue interest during the life of the loan but the interest is handled much differently in each case. Basically, the interest on subsidized student loans is paid by the government while a student maintains a normal course load and stays in school.

So if a student borrowed $5,000.00 with a subsidized loan they would owe $5,000.00 when they left school because the government would have made all of the interest payments. Once out of school, the student is responsible for all interest. On the other hand, if a student borrowed that same $5,000.00 with an unsubsidized loan, the interest would accrue all the while they were in school and the amount they owed when they left school would be something more than $5,000.00. Obviously subsidized loans are the better financial deal because they result in less student loan debt.

One of the great features of government student loans is that payments are deferred while a student is in school. That means a normal student who attends a four-year college or university won’t have to begin making any payments on their loans until they graduate. This way, students can concentrate more on their studies and less on their financial burden.

This information just scratches the surface of the student loan puzzle. There are different programs, different limits, and different payback options. For the most part, you can get a student loan without cosigner but having a cosigner is an option as well. It really is a part-time job just figuring the whole thing out.

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