Managing Student Loans

The necessity of obtaining a loan to help finance a college education is inevitable for the majority of students who pursue a degree. Education is expensive but can be considered a wise investment due to the increased opportunities and higher income it most often results in. Some students are lucky enough to obtain scholarships and grants to finance their way through college, and some are born with the proverbial silver spoon in their mouths. Most however need to apply for loans which can often result in the new graduate starting their working career with a debt burden in the region of $20000.

There are two main categories of college loans: federal student loans and private student loans. Federal loans represent the cheapest form of student borrowing and should be the first port of call for every student. One applies for federal loans by completing and submitting the standard FAFSA application which will determine how much family contribution is needed and how much federal money will be offered through loans.

The federal department of education is now responsible for administering all federal student loans which are applied for through the FAFSA form. All applications for federal funding are free of credit checks, and there are three federal student loans available. The federal Perkins loan is a means based loan which is only awarded to the students who demonstrate the greatest financial need. The federal Stafford subsidized and unsubsidized loans are the most common loans awarded, the former going to students with the most financial need, though a combination of both subsidized and unsubsidized loans may be awarded.

The Stafford subsidized loan has all payments deferred until six months after graduation and until this time the federal government assumes the interest on the loans. With the unsubsidized loan the interest is due on a monthly basis to be paid for by the student, but it is possible to have the payments deferred until six months after graduation. However in this case the interest will accrue. Each of these loans come with low fixed rate interest charges, and need to be reapplied for on an annual basis. They can be consolidated together after college for ease of payment.

In addition to these federal loans available to students, parents may apply for a parent PLUS federal loan. However this loan is subject to a credit check and will be issued to the parents and is not transferrable to the student. It offers a fixed rate interest at a higher rate than the student loans.

If there is still a gap left after federal student loans have been full utilized then students need to make up the difference with private student loans. These are available from a variety of lenders such as banks, and specialized student loan lenders such as Sallie Mae. Invariably private loans cost more to service than federal loans, are subject to a credit check, and carry variable interest rates.

Students who have not yet established their own credit history will need a co-signer to stand as guarantor on a private loan. Interest payments will be due whilst the student is in college though individual lenders may agree to defer payments, but the interest will accrue. It is important to consider any fees attached to private student loans and not just the interest rate, and loans which carry a penalty prepayment fee should be avoided.

Private student loans should be considered as the last option for students who should seek out scholarships, grants and federal funding first. It is important for students to understand that all student loans, whether federal or private, are non dischargeable, and that borrowing the least amount needed is the wisest option to avoid long term debt.