What is a Student Loan?

What is a Student Loan?
Article Financial Two Cents
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Student loans seem to constantly be a hot topic, especially with the rising costs of tuition at many colleges and universities. Did you know that the average student loan debt for a 2016 college graduate is $37,712? This number only seems to be rising as the years go by.

Definition

For many incoming college students, paying for their schooling outright is simply not an option, which is where student loans usually come in. A student loan is a loan that helps to finance college tuition, room and board, a computer and even book expenses. These are common and necessary costs that come with going to college, but the price tag is so steep that a loan is often the only way to pay for it all (many times even with scholarships).

Federal vs. Private Student Loans

Not all student loans are equal. There are two types, federal student loans and private student loans. Federal loans are funded by the federal government and often include benefits, such as income-driven repayment plans, a fixed interest rate, deferred payments, etc. Private student loans are funded by an outside financial institution such as a bank or credit union. Here are some of the key differences between the two:

Federal Loans

  • Deferred payments- repayment of your federal loan doesn’t start until you graduate, leave school, or are no longer enrolled as a full-time student.
  • Fixed Rates – The interest rate is fixed and usually much lower than a private student loan.
  • Subsidized Loans – some people may qualify for a subsidized federal loan, which means the government pays the interest of the loan while you are enrolled in school.

Private Loans

  • Payments – the majority of private student loans require repayment to start right away, even while you are still in school.
  • Interest Rates – private student loans usually feature variable interest rates, meaning the rate can change (up or down) throughout the life of the loan. Private loans also generally have higher interest rates and may require a cosigner.
  • Interest Payments- private student loans do not have a subsidized option. The borrower(s) are responsible for paying back the loan, interest included.

What should I do?

Before looking into private student loans, be sure that you exhaust all of your financial aid options first – including Federal Pell Grants, Federal Work-Study Programs, and any Federal Loans offered to you through your Financial Aid Office. Remember, as outlined above, federal options generally have more favorable terms, especially while you’re still enrolled in school.

Now, if you’ve already used all of those options and still need more funds for your education, start shopping around for private student loans. Be sure to check with your primary financial institution, as well as other banks and credit unions that offer student loans. Be sure to compare the rates and terms for all to see what works best for you. Also, only borrow what you need for your education and for the current school year! It can be tempting to borrow more for any “just in case” situations, but keep in mind this is money that you do have to pay back, plus interest.

A student loan can be a great tool to help you achieve your higher education goals, just keep in mind that you should always have a plan in mind for how you will pay this back.

References & Related Links

Debt.org– resource for debt assistance

Federal Student Aid – Federal Versus Private Loans – a great resource to learn about all things Financial Aid

What kind of financial aid is available? – from the University of Hawaii at Hilo’s Financial Aid Office

HFS Student Loans – learn about our program and apply online