Financial Matters: College Loans

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As we have often said, paying for college is a significant challenge for many families. Once all types of grants, scholarships, work study options, jobs and family contributions are cumulatively considered, many families find they must borrow money to cover the remaining costs. Unlike the grants and scholarships, loans must be repaid — with interest. Unlike the free options, loans must be repaid, and repaid with interest. The interest rate is a charge added to the borrowed money as a percentage of the total amount. A higher interest rate impacts the amount you’ll owe over the life of the loan. Just as there are many types of scholarships and grants, there are many types of student loans. Loans are offered by the federal government, state governments, colleges themselves, and private organizations.

 

Federal need-based and non-needbased loans:

Colleges may award a Perkins Loan to students with the greatest financial need.

Direct Subsidized Loans are interest-free while the student is in college.

Direct Unsubsidized Loans charge interest but students have the option of postponing payment of that interest while in college; it will be added to the loan upon graduation. This invariably means you will owe much more, so, if possible, pay this interest while you are still in college.

Federal Direct PLUS Loans offer parents and graduate students the option of borrowing the total cost of college, minus any other financial aid that a student is offered.

State Loans: Each state has its own educational loan granting options. For specifics, go to the US Department of Education’s list of state higher-education agencies.

Private Loans: Typically, these are loans that are neither subsidized nor need-based. They may require that someone else (such as a parent) co-signs on the loan, and interest rates can vary significantly.

Banks usually have the highest interest rates and can be the least forgiving. They’ll likely run a credit check so work on your credit as early as possible. The higher your score, the lower your interest rate will be.

Some private organizations (such SallieMae or Discover Student Loans) offer better rates, so explore all options. Most require some kind of academic performance standard, are specific to location, and may demand that the applicant has exhausted all other options.

Some colleges offer their own low-interest loans with reasonable interest rates.

It is of paramount importance for all families to really explore and understand how loans work. For example, it’s almost always best to explore federal need-based loans first. Why? Because the federal government is supporting your education by paying the interest fees on your loan while you are in college. Interest rates are usually among the lowest; you are able to defer payment until you graduate and, hopefully, have attained gainful employment; no credit check is required and no academic performance standards are required.

Before you take out loans, be sure to review the financial aid award packages provided by your colleges when they offer you admission. Do not accept any offer without comparing these all-important packages for their mix of grants, scholarships, work study and loans. If you are offered a loan, know that you are not required to take the entire amount! Take only what you need.

Look into working while you are in college – on or off campus. If your college has a work-study program, see if you are eligible. Remember that your chosen college really wants you to attend, so don’t hesitate to ask questions. If you don’t understand your financial aid award or options, make a phone/Skype appointment with the Financial Aid Office and walk through everything. Know the rules and regulations for any loan you have been offered and be very clear on the guidelines. This due diligence is even more critical should you choose a private loan. Ask the important questions such as: How much will the total cost of this loan be for me? What will my monthly payments be? Is this interest rate fixed or variable? How can I get a lower interest rate? What are the associated fees?

Make sure you and your parents complete the FAFSA and, if required, the CSS Profile within the published timeline. Compare all your financial award packages to figure out your best option and always, always, always read the fine print. This is a long-term commitment, so be sure you look at the terms and conditions and, if in doubt, ask questions.