Student Loans

What Every Student Should Know About Student Loans

Student loans tend to get a bad reputation. To avoid a negative experience, it is vital that students and their parents learn as much as they can about student loans and how they.

What are They?Student Loans

Student loans fall under the category of financial aid and are ideal for helping a student receive the funds necessary to attend the college or university of their choice. There are different types of loans available and each one comes with its own set of rules and regulations. Perhaps the most vital piece of information to remember when it comes to this topic is the fact that student loans must be paid back over a period of time. A common pitfall many students make when pursuing these types of loans is not budgeting for the repayment process or blindly applying for a loan without reading the fine print.

The easiest way to describe the student loan process is as follows (this is a very basic description that may or may not apply to certain loans and lenders):

  • A student applies for the loan by filling out an application and providing the necessary documentation and paperwork.
  • If approved, the student will receive the funds in increments throughout the duration of the student’s college career.
  • After graduation, the student will then begin making payments according to the repayment schedule set by the lender.

Student, Parent & Private Loans

School loans are those where the student him/herself applies for a loan through the federal government. What makes this type of loan beneficial for students is the fact that many do not use credit checks for approval and come with low, fixed interest rates. A fixed interest rate means the rate given at the time of the loan approval will stay the same throughout the life of the loan. Additionally, there is the opportunity to “defer” payments for up to six months after graduation. What this means is that during those six months, payments do not have to be made since it is understood that it takes some time for graduates to secure employment and begin earning significant income. Perkins and Stafford loans are among the most popular and highly sought after types of student loans.

Parent loans describe a situation where it is the parent and not the student who applies for a loan in order to have enough funds to put their child through college. However, the parent is solely responsible for paying back the loan, even though it is their child that is using the funds. For arrangements where the student makes the actual payments, should he/she fall behind or miss any payments altogether, the lender will still hold the parent liable. PLUS loans are an example of a popular parent loan.

Private loans deal with lenders that are independent of the federal government. Either the student or the parents can apply for private loans but typically have to deal with stricter eligibility requirements, including having a good credit score. Depending on a student’s financial situation, securing both federal and private loans is a common solution to receiving enough money to afford school. However, the interest rates for private loans tends to be varied instead of fixed, which could result in paying back a much higher amount than originally approved for.

Consolidation Loans

Although it is possible to receive multiple school loans, trying to pay them all back at the same time can be quite a hassle. This is where students and their families have the ability to check out consolidation loans. Pursuing this route involves combining several loans into one overall loan and dealing with a single lender. It is important to note that while it is possible to consolidate almost all federal loans, private loans are not allowed to be combined. Borrowers with private loans can, however, seek out private consolidation loans by talking to their lender(s).

The Repayment Process

Student loans are a financial obligation that must be met long after graduation. While the exact details of the repayment process vary from lender to lender and the specific terms agreed upon between the lender and borrower, there is a general process that students and their families can expect to deal with. When a student is close to graduation, the lender will typically arrange for what is known as “loan exit counseling.” Upon approval of a student loan, there is also “loan entrance counseling,” which helps to prepare the borrower for receiving their funds and inform them as to their rights and responsibilities. This same process applies for the loan exit counseling session, except that the loan repayment terms, conditions and schedule will be discussed instead.

During this time, borrowers will be given a lot of information as it relates to paying back their loan on time. Grace periods and deferred payment are also discussed during the counseling session. If a student’s enrollment status is less than half-time or he/she has to drop out for whatever reason, negotiating for a grace period is possible. Loan payments do not need to be made during grace periods, which give the borrower enough time to either get their finances together or return to school. Most federal student loans allow for the first payments to be deferred or delayed for up to six months. This provides a bit of breathing room financially for students that have yet to secure a job after finishing school. Once a student begins making loan payments, it is his/her responsibility to monitor their repayment schedule and ensure each installment is made on time to avoid going into default.

Consequences – School Loans

“Default” describes what happens when the repayment for school loans is not made on time or there is a violation of the terms and conditions on the behalf of the borrower. Consequences include a negative effect on a borrower’s credit score, having the lender garnish wages, seeking legal action to collect the amount owed and the inability to become eligible for future financial aid.