Understanding Student Loans

March 13, 2009 by  
Filed under Student Loans

Student loans are a very complicated area within the realm of credit subject matter. Several different types of student loans exist, whether subsidized or unsubsidized, and this affects the amount available, conditions and rates of these loans. You’ll need to be aware of these differences before choosing the best way to finance your all-important education as part of a long-term debt management plan.

Your school advising office and general government websites may help to answer some of your initial questions. A Stafford Loan is a popular choice in student loans. These may be able to partially or fully finance your education, and have the added advantage of no prepayment penalties. This means that balances can be paid off at any time with no added charge to you – when you land that new, six-figure job after graduation!

Stafford Loans require no payments while you’re still in school, which is great if you’re going full-time and want to dedicate 100% of your time and energy toward your studies versus getting a job. No credit check is required, but you do need to maintain half-time status as a student at all times. Upon graduation, the government allows you six months before having to start make payments on the amount you owe, giving you time to find a well-paying job and plan for your future debt reduction.

This type of loan does limit the amount you may borrow each year. They also include additional charges not found in other financing options, such as 3% in federal origination and default fees. Again, these amounts will vary between loans and different borrowers.

After the 6-month grace period, payments are relatively low compared to the amount financed, but are planned over a 10-year repayment period. This can result in a very expensive education with added interest paid over this time!

Other options for student loans may include personal loans through a third-party financier, in addition to unsubsidized loans, grants and scholarships. Some of these options will require repayment immediately, interest payments while the student is still in school, or securing a piece of property.

These options may save significant funds in added interest charges over time, but will require either help from mom and dad or finding a part-time job to cover current charges. Of course, the age-old option of simply saving well ahead of time can also help to pay for an expensive education later in life.

Starting sooner rather than later, no matter which vehicle you choose, can help to pay for your formal education when the time comes. 529 plans exist just for this purpose, and can also provide the added incentive of tax deductions for contributions made on a yearly basis.

These investment and savings vehicles should be well-diversified to reach your goals. Always consult a professional investment advisor to determine the best way to invest these funds for future education costs.

Also consider the many options available through employers today: finding a full-time job that helps to pay for part of your education will still leave you with time to attend classes in the evening, and make money in the meantime before graduating debt-free.