How Student Loans Work

Students have many options for financing the cost of college. Loans are just some of those options. However, all avenues for securing scholarships and grants should be pursued before trying to find a loan. This is because scholarships and grants do not have to be paid back, while loans do. There are many different types of loans available for consideration, and many factors of which you should be aware.

First of all, it’s best to get your Free Application for Federal Student Aid (FAFSA) in early. In fact, it should be turned in as soon as you or your parents have mailed in your annual income tax forms. While the federal government uses this information in order to assess your need for aid, state governments also offer grants based on your form. Most of the time these state grants are first come first served, so the earlier you apply the better chance you have of receiving this type of financial aid. Also, this is the method in which you apply for government loans as well.

If you find you did not receive enough aid to cover your expenses, move on to applying for a loan. There are several types of government loans to consider. The first is a Parent Loan for Undergraduate Students (PLUS) which puts the responsibility of repayment on parents, at an interest rate that’s currently 8.5 percent. There is no limit on the funds, and repayment must begin 60 days after disbursement with no grace period. There is a credit check involved. If the parents are denied the loan, the student will have an increased limit when they apply for Stafford loans.

Stafford loans are either disbursed by banks or directly by the federal government. There are subsidized loans, meaning the government pays the interest while you are in school. They are based on need. There are also unsubsidized loans in which you are responsible for the interest which accrues. They are not need based. However, you can elect to defer the interest payments until after graduation. Students are not required to repay these loans until six months after they graduate. Loan caps differ depending upon how far along you are in your schooling. Freshmen can borrow up to $3,500, sophomores up to $4,500, and juniors and seniors $5,000. The limits increase if you are an independent student, your parents were denied a PLUS loan, or if you are a graduate student. These loans currently have a fixed interest rate of 6.8 percent, but some lenders may offer rate reductions based upon your career path, such as for teachers or nurses.

A school based loan, offered with funds provided by the government, is called the Perkins Loan. It is need based, subsidized, and currently has a fixed interest rate of 5 percent. Undergraduates are eligible to receive up to $4,000 per year, while graduate students can receive up to $6,000. Your school’s financial aid office determines if you are eligible to receive this type of loan.

A first time borrower can expect his or her loan funds to be delayed by about a month after those of someone who has borrowed before. This means you should apply for your loan as soon as possible. You will also be required to take an entrance interview in order to receive your payments. You will probably be able to take this interview online. Your financial aid office will assist you in completing the interview.

If you know you are going to need loan money to cover college expenses, check with your school’s financial aid office. Some schools do not accept Stafford loans, so you would need to make other arrangements for a loan or find a school that will accept one. Private loans from banks are an option, but be aware that most of the time you will be required to repay them without a grace period. There are some, such as one offered through U-promise, that can be deferred until after graduation. Also, since they are based upon credit scores, many students may not qualify due to a lack of credit history.

Don’t wait until the last minute. Get your FAFSA filled out, and explore all of your options regarding paying for college. This will ensure a smooth transition and better prepare you for any setbacks that may come along.