At the time of disbursement, loans may seem like free money since repayment is not required immediately

At the time of disbursement, loans may seem like free money since repayment is not required immediately

Many students are eligible for some type of free financial aid, either in the form of need-based grants, or merit scholarships. However, grants and scholarships do not always provide enough funds to cover rising college costs. After you have applied for and received all possible free aid, it might be time to find a student loan or two to meet the rest of your educational expenses. Federal and state governments have devised guaranteed student loan programs that allow students to borrow money at low-interest rates to make up the difference that free aid doesn’t cover. Before you decide to borrow money, however, there are some important issues to consider:

  • What are the interest charges?
  • How long do I have to repay the loan?
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  • Does repayment begin during or after college?
  • What is the minimum payment required per month?
  • Will my income after college cover all of my expenses, including loan payments?

It is important to remember, however, that you will eventually have to repay all the money you’ve borrowed, plus interest. Some borrowers may have the idea that the government is too big and bureaucratic to keep track of all the student loans they issue. In the past this was often the case. Yet, even though recent legislation has increased the total amount of loan money available, default rates are dropping, standing currently at about 7 percent.

To avoid joining those who find themselves deeply in debt, a good exercise to perform before you decide to borrow money is to seriously consider your current financial situation and then project what your future income and expenses will be following graduation. While this will certainly be a difficult task, it could prevent you from extending yourself beyond your financial means.

To financially plan your future, you need to estimate the total cost of your education, then estimate the amount of money you expect to earn after graduation in your chosen profession. (See the entry-level income chart) Now deduct your cost of living expenses to determine how much money you have left for monthly loan repayments. A financial advisor or loan officer at a bank could help you with any of these formulas.

Subsidized vs. Unsubsidized Loans

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Students and parents should be aware that government loans may be either subsidized or unsubsidized. A subsidized loan does not accrue interest until the student graduates or leaves school and is obviously the best option. Unsubsidized loans are less desirable because interest on the total loan amount accrues while the student is in school. Here is a breakdown of government loans:

  • Stafford Loan: These loans are either subsidized or unsubsidized. Your school makes the final determination based on financial need.
  • PLUS Loan: These loans, available to parents of students, are unsubsidized, accruing interest while the student is in school. Parents do not have to prove financial need to secure one of these loans.
  • Perkins Loan: These loans, based on exceptional or extreme need, are subsidized by the government and generally have a lower interest rate.

TIP…Since many schools favor a January or February deadline for filing all aid forms, which is typically too early for most people to have completed their annual income tax returns, it is acceptable to estimate your yearly earnings on financial aid forms.

Student Loan Repayments

When you sign a promissory note, you are agreeing to repay all the money you borrowed. A promissory note is a binding legal document stating the amount of money you are borrowing and the terms under which the loan is to be repaid. Repayment on almost all of the federal and state student loans begins after the borrower has graduated from college or drops below half-time enrollment status.

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