Student Loans

Going to college has direct and indirect costs.  There are no real indirect costs to a student loan, except possibly some time investment.  If you believe you will need a student loan, the very first thing you must do is submit a Free Application for Federal Student Aid (FAFSA) online at even if you are certain you do not qualify for need-based scholarships or Pell grants.  FAFSA is the gateway to qualifying for government student loans—otherwise you will have to go to a private lender.  The FAFSA also determines the amount of government student loan for which you are eligible.

There are three types of government student loans, described here in order of preference.  With the Subsidized Stafford Loan, the government pay the interest at a reduced rate as long as you qualify for the loan.  You maintain eligibility by going to school at least half-time every term.  With the Unsubsidized Stafford Loan, you must pay interest as it accrues or allow the interest to be capitalized until you graduate or lose eligibility.   Capitalization of interest means the lender to add the interest to the loan principal each month. Every month the accrued interest will increase because interest is now accruing interest.  Naturally, lenders love to capitalize interest.  It is their default position.  Every month you should pay a little more the the accrued interest to prevent any capitalization of interest and reduce the principal a little.  

The third type of student loan is the Parent Plus loan which your parents take out in their own names.  Parent Plus Loans, like unsubsidized Stafford loans, begin accruing interest immediately upon disbursement. Interest paid on unsubsidized loans is deducted on the student’s tax return no matter who actually pays the interest.  Interest paid on the a Parent Plus loan is deducted on the parent’s return again no matter who actually pays.  Be careful to maintain eligibility.  Losing eligibility will throw all your loans into the six month grace period instantly, sometime even retroactively.

If you are eligible, getting a student loan is easy.  You choose a lender, fill out the application, and sign the master promissory note.  In subsequent years, all you have to do is indicate you accept the student loan offer on your school’s financial aid offer web page and the loan is yours.  You will have to go through an entrance counseling program which is usually offered on your school’s website as well and takes maybe twenty minutes.  Sometime during your last term at school, you will have to go through a similar online exit counseling program.
What maybe construed as indirect costs of student loans appear after graduation.  The biggest mistake students make is to accept the maximum loan offer, whether they need it or not.  You must clarify the difference needs and wants and use students loans to pay only for needs.  You need to minimize, as much as possible, your student loan obligation after graduation.  You will probably have capitalized way too much interest, creating a burdensome debt obligation. Students loans generally survive bankruptcy proceedings.  If your student loans are arrears, the IRS has first dibs on any tax refund.  Your credit rating will be damaged.  

Make sure you pay at least the required interest and little more for each student loan each month.  Push as much additional payment as you can manage to the loan with the highest interest first, and work your way through your loans.  You must be sure to specify to which loan the lender should apply additional payment.  Otherwise, the lender will default to the loan with the LOWEST interest first.  When interest rates are low, apply to consolidate your students loans at the lower rate.  You want to avoid being one of those fifty-year-olds who is still trying to pay off student loans.