Get Smart About Student Loans

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Your son knows where he wants to go to college. Your daughter knows what she wants to major in. But do you know how you’re going to pay for their college educations?

It’s no secret that college tuition, even at in-state, public universities, continues to rise at a rate far outpacing inflation, and that paying for college has become an even more challenging task.

Fortunately, students and their families can ease the pain of paying for college by applying for a wide range of student loans. Unlike scholarships, student loans have to be paid back. However, these loans come with favorable terms, such as low interest rates and payments that don’t come due until several months after students have graduated.

Before your sons or daughters head off to college, make sure you — and they — understand the basics of student loans. The odds are high that they will need to take on at least some student loan debt to make it to graduation.

Student Loans 101

There are two main types of student loans: federal and private.

Federal student loans — including the common Stafford loan — are the better of the two options because they tend to have lower interest rates. Students also do not have to repay these loans until after they graduate or leave school. In fact, federal student loans account for nearly 70 percent of all the student aid received by graduate and undergraduate students.

Most federal student loans are handed out on a need basis. In other words, students are more likely to receive federal loans if they can demonstrate that they need financial assistance to afford the costs of college tuition and fees. The main challenge with federal student loans is that they are limited. There is only so much assistance students can get in the form of these loans, and again, this limit is based upon students’ financial needs.

A popular type of federal student loan, the Stafford loan, comes in two main types: subsidized and unsubsidized. With subsidized Stafford loans, the federal government pays the interest for students who attend classes at least on a half-time basis. Like other federal loans, this loan is given out on a need basis.

With unsubsidized Stafford loans, students have to repay the accrued interest. Additionally, this loan is not awarded based upon financial need.

As the name suggests, private loans are provided by private institutions, such as banks. These loans are not as attractive as federal ones, because they tend to come with higher interest rates. Some private loans may also require students to begin repayment before they graduate, which could prove challenging.

Although there are some disadvantages, there are many benefits to private student loans. For one thing, they are not need-based or limited based on your family’s financial standing. They can also fill in the gaps left by federal student loans and often come with higher lending limits, meaning students and their parents can borrow a larger amount of money to cover the costs of college.

Parent Loans

Parents can also take out federal student loans, such as the Parent PLUS Loan, to help cover the costs of their children’s college education.

Under these loans, parents can borrow up to the total cost of their dependent children’s college education minus whatever additional financial aid they or their children have already received. For example, if the annual cost of attendance is $25,000, and the student receives $5,000 in student financial aid, the Parent PLUS Loan program can provide parents with up to $20,000 in loans.

Parents can also take out private student loans to cover their children's education costs. Similar to other private loans, this financing might come with higher lending limits, but might also come with higher interest rates, too.

Paying it Back

Between making it to class, term papers, and final exams, students are not often very focused on the debt they incur during college. However, it is still a debt and paying that money back could be a financial burden in the future.

That’s why it’s important for students to do whatever they can to limit their amount of student loan debt. If this means seeking out additional scholarships, attending community college for two years or choosing an in-state school versus a private institution, strong consideration should be given to those options.