Loans 101

The costs of a college education are increasing at an alarming rate. Financing a four-year college education often requires some sort of financial assistance. Each year, college students must submit a FAFSA, a financial-aid form from which the government determines financial need. Many students agree to accept student loans when grants, scholarships and out-of-pocket contributions are exhausted. Students may qualify for one or more types of loans that can cover tuition, room, board and book expenses.
Loans are distinct from other types of financial aid because they must be repaid with interest. And that can make them significant financial obstacles for college graduates.
Three basic types of student loans are available: the Stafford Loan, Perkins Loan and PLUS Loan. The Stafford Loan requires no collateral, has a low interest rate and must be repaid beginning six months after graduation for students attending school at least half time. Dependent students may borrow from a minimum of $2,625 their freshman year and up to $5,500 their senior year. Graduate school loan assistance is also available at higher limits.
In many cases, the Stafford Loan can be subsidized based on financial need, and interest will not accumulate until six months after graduation. Stafford Loans are designed for students who cannot cover all of their expenses during college and who will likely gain employment upon graduation.
The Perkins Loan is based entirely on financial need and offers a low interest rate. The maximum amount a student can borrow is $4,000 per year for undergraduate and $6,000 per year for graduate school. These loans do not require repayment until nine months after graduation.
The PLUS Loan (Parent Loan for Undergraduate Students) is offered to parents of dependent students who require financial assistance. The interest rate is low, and repayment begins 60 days after the final loan payment. If you or your teen receives a loan, you or they must sign a promissory note. This document acknowledges your acceptance of the loan’s terms and conditions.
Typically, student loans are managed by banks and financial institutions, which handle payment options and determine how much interest will be owed. The bank will provide you with a payment schedule, as well as the approximate date that the loan will be paid in full.
For a new college graduate, the end seems like a lifetime away. It can be shocking to open up that first student loan bill and not know how it will be paid. For this reason, those who do not gain employment right after graduation may find themselves in a tough spot. Alternatives are available if repayment is very difficult or impossible. Forbearance allows you to take a 90-day break from the repayment period. However, be aware that a penalty is involved: Your student will have even more interest to pay. This situation is a last resort for individuals who are experiencing temporary financial difficulties.
In addition, if your student has more than one student loan and are finding that the various payments are too difficult to manage, you can apply for a consolidation loan. This type of loan combines all student loans into one new loan with just one payment. The payments are often much more affordable—but they also come with a price. A consolidation loan usually extends the period of repayment by a number of years, thereby adding additional interest to the amount owed. It is beneficial to make payments larger than the minimum payment whenever possible in order to reduce the amount of money owed in the long run. Remember that the loans must be repaid within a specified period of time. The consequences of failing to repay can result in default, which can damage your teen’s credit rating and the chances of getting a car or a home in the future. If your student decides to re-enter school at a later date, student loan payments can be delayed during this time. Repayment begins when school ends.
By reviewing your current financial situation, your family may be able to contribute more from your pocket and save on the amount that your family must borrow. If looking at a number of schools, determine which offers the best financial packages. The cheapest school may not offer the most assistance. Take advantage of what is offered, and examine all of your options.

TAKE IT FROM ME
My personal experience with student loans has been a roller coaster, to say the least. Upon graduation, I was faced with a considerable figure to pay back. The assumption is that graduates will find a job and will be able to make loan payments on time each month to build a strong credit rating. The reality is that finding employment with a respectable salary is more difficult than it sounds. I landed a job with a low salary and had trouble making my payments from the start. To make matters worse, my loans were divided between three different firms to which I had to make payments each month. I somehow managed to make my payments for a while, but eventually my standard of living increased and the troubles began. After changing jobs several times and making a few late payments here and there, I consolidated my three loans into one larger loan. I was finally able to make my payments with ease and timeliness. However, consolidation adds additional interest and time to the loan period. Therefore, my loans that were required to be paid back within 10 years have now been extended to over 15 years. The lesson here is to explore all options before plunging into the world of debt.

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