Poor Student No More

When I first took out a student loan, I had no idea what I was getting into.  All I knew was that I was going to get money to pay for college that I didn’t have to pay off until I graduated.  What I should have known are these basic facts:

There are two types of student loans - government loans and private loans

Government Loans

• Government loans are need-based, determined by the Free Application for Federal Student Aid (FAFSA).  The deadline for filing a FAFSA is generally February 15 and must be done every year.

• There are five kinds of federal loans: Stafford loan (goes in the student’s name), Perkins loan (college is the lender rather than government), PLUS loan (goes in the parents’ names), Graduate PLUS loan (allows graduate students the amount and terms of the PLUS loan), and Consolidation loan (combines all student loans into one).  For our purposes, we will concentrate on the Stafford Loan.

• Federal loans must be repaid with interest, but typically have low interest rates and offer flexible repayment terms (such as deferment).  If the Stafford loan is subsidized, it means the government will pay the interest on the loan while you are enrolled in school and during periods of deferment.  If it is unsubsidized, it means that you must either pay the interest or let it be added to your loan principle.

• The Stafford loan has limits to what you can borrow.  It starts at around $5,000 and increases for each year you are in school by about $1,000.  (1st year - you can borrow $5,500, 2nd year you can borrow $6,500, etc.)

• The interest rate on Stafford loans is fixed at 6% for subsidized and 6.8% for unsubsidized.

Private Loans

• A non-federal loan from a private lender, like a bank or credit union.  These often have variable interest rates and require credit checks.

• Most students need a co-signer to have enough credit-worthiness.

• Most of these offer lower interest rates that credit cards and repayment deferment options until after graduation.

Private loans can be helpful, flexible and affordable, but government loans are better in terms of interest rates and flexibility.

Using myself as an example, I have:

• $15,054 in Federal loans with 6.5% interest on half of the funds
• $25,154 in Private loans with an average interest rate of 8%.

Grand total:  $40,208