What is a student loan?

A student loan is is a loan specifically designed to help students finance their education at a lower interest rate than one would typically receive. For the most part, the loans are issued by the federal government, but there are many options to borrow from private institutions as well. These private-issued loans usually have higher limits and a slightly higher interest rate than government-issued loans.

Common federal loans are the Perkins and the Stafford, and these loans are disbursed directly from the government to the college institution you are attending. There are two types of loans you can receive from the government: subsidized and unsubsidized loans.

To read Loans: Subsidized vs. Unsubsidized, click here.

Capitalization of your student loan is what you want to try to avoid while in school. Most students allow their interest to capitalize while they are still in school, telling themselves they’ll worry about it when they graduate. If you take one thought away from this article, consider paying your interest on your unsubsidized loans while you are still in college. Your bank account will thank you later.

Note: In some cases, you may have to directly contact your lender to alert him/her that you want to make interest payments on your loan. If you haven’t talked to your lender about interest on your unsubsidized loan, chances are the interest is being automatically capitalized.

Although it does take some commitment to pay your interest every couple of months, it pays off in the long run. Usually, the interest due for the period is quite low, depending on the amount of your loan. Instead of stuffing that statement in the drawer of your desk when you receive it each month, write a $25 check to your lender. It’s not much money, but it makes a big difference. Or, to make it even easier on you, set up an automatic bill payer to have that amount deducted from your account each month. If you don’t see it so you won’t miss it!

Advantages to Federal Student Loans

1) Almost everyone qualifies. Most students qualify for some amount of a student loan. It is worth the effort in applying through the FAFSA, even if you think you may not be eligible.

2) Low interest rate (6.8% for federal Stafford loan)

3) Flexible-Six month grace period

If you choose, you can defer your payments on your student loans until six months following your graduation date or after the student is enrolled less than half-time and has not graduated.

To read Loan Repayment: Choose the Best Option for You, click here.

Aspects to Consider

How much financial aid you need? Federal loans have limits depending on your class status (freshman, sophomore, and so on). Also ask yourself how the loan will work into your personal situation. Determine whether you want an Independent (private) loan or a federal loan. Keep in mind, private loans have much higher limits for borrowing, but also carry heftier interest rates. Federal loans have a lower rate with a lower borrowing limit.

Remember: You are responsible for the interest that accrues on your unsubsidized loans while you’re enrolled in school. Whether you defer it until after graduation and let it capitalize or pay the interest as it accrues, you eventually have to pay. If it is capitalized, you will pay interest on the amount you borrowed plus the interest.

Take An Interest In Interest: It Can Make You or Break You: Read now

Back to Loans Section

View Chelsea's Profile      Subscribe via RSS