How a loan works

 

As a young adult entering ‘the real world’ you may not fully understand how a loan works. The basic steps:

•    You borrow a set amount from a lender, like the government or a bank

•    You pay back that set amount plus interest

•    If you don’t pay it all back, the lender owns that property (or can take something else of equal value).

Interest Rates

The interest rate is what the lender charges you to use the money until you pay it back. It can be a fixed or variable rate.

A fixed rate works like this:

1.    You get $5,000 in a Federal loan.

2.    The interest rate is fixed at 6.8%.

3.    A 6.8% interest on $5,000 is $340 a year added onto your loan.

4.    Deferring* your loans until after college means you will actually be paying back $6,360.

*Deferring your loans is often an option with government, and some private, lending. It means that you do not have to make payments until after you have graduated or dropped out of college. If your parents take out a private loan, often their payments start immediately.

Often private loans from lenders have variable interest rates. They may seduce you in starting with a low interest rate, but over time the interest can change and increase without notice or permission. This can end up costing you thousands more.

Tax Benefits

Good news! Getting a higher education is a tax benefit. If you are independent of your parents/guardians and responsible for paying the loan back, then you get to deduct your student loan interest from your taxes. It’s not much, but it helps.

Types of Loans- See more on these types of loans below

Subsidized

Unsubsidized

Private and/or Personal

 

How to apply

All federal and state grants or loans are based off what is in the FAFSA. Federal Stafford loans, Perkins Loans, and Direct loans are based off the information in the FAFSA. The government gives you an amount based on your needs, and will send you and your school a notice on how much assistance you will receive.

Direct Federal Loans or Federal Family Education Loans (FFEL)

Depending on which university you attend, your financial aid office or a student loan program, will act as your lender. The loan is the same, the only difference may be discounted loan fees or choice of repayment plans

Private/Personal Loans

Parent and Graduate PLUS Loans are based on credit checks instead of an FAFSA application. A number of banks and lenders have student loans available. If your credit score is high, then your approval and interest rates are increasingly easier.

Other Applications

After the FAFSA and the bank loan forms, your university might have more options available. Always ask about the College Scholarship Services form if the college doesn’t automatically have you feel one out.

Entrance/Exit Counseling

Before, and after, your schooling you will be required to get some financial counseling. Most of these sessions are online through your lender, and lasts no more than 20 minutes. It’s to help you understand the basic ideas and responsibilities of your student loan.  

 

Types of Loans

Subsidized

Subsidized loans are for students who qualify for a federal student loan. These loans do not charge interest on the loan while you are in school- which can save you thousands of dollars. See how interest can affect the amount you pay back (link to ‘how loans work’).

Stafford loans have a six month period after graduating, called the ‘grace period’, in which the federal government pays for the interest on the loan. After the grace period, you have full responsibility for making monthly payments.

Unsubsidized

Most loans are considered to unsubsidized loans (Perkins, private/personal loans) because the federal government doesn’t help with the interest; the full responsibility is yours. Unsubsidized loans are different than subsidized loans because you have to start paying on the interest immediately-even while in school! Many times the interest is simply deferred, so you can start paying at the same time as a subsidized loan.

    

Unsubsidized federal loans have exceptional rates compared to that of private loans. And you have the six month grace period like the subsidized loans. There are four options after college to pay for these loans:

1.    Standard: fixed monthly payments for 10 years.

2.    Extended: monthly payments for up to 25 years.

3.    Graduated: payments begin small and get bigger for up to 25 years.

4.    Income Sensitive: your monthly payments are relative to your income level.

See Private and/or Personal Student Loans below

These loans are through private lenders and banks, therefore many of them have their own restrictions, interest rates, and repayment plans.

 

Private and Personal Student Loans

Private Loans

Private loans often have high variable interest rates with high loan amounts. These are credit-based loans given out by banks and student loan lenders, like Bank of America or Sallie Mae. Often it is the parents seeking these types of loans to pay for their child’s education. The downfalls of private loans:

•    If you have poor credit/no credit chances you will have to find a co-signor

•    Variable interest rates could cost you more in the end

•    No grace periods: you start loan repayment as soon as you get the first check

•    Could be laden with hidden borrower fees

•    Often require a minimum loan amount

Choose the lender wisely. Remember to compare the following components:  

•    different interest rates

•    loan limits

•    borrower fees

•    repayment terms

Personal

Personal loans differ from private loans, as they are designed especially for college student. The both are supplied by banks and lenders, but the money from private loans can be used for anything, personal student loans make you comply with more requirements:

•    Must be enrolled at least halftime in a degree program

•    Must have a good credit history or you have to borrow with a co-signor

•    Repayment terms could be limited

•    Maximum loan limits vary

•    Interests are variable

•    You must prove enrollment.

•    Allows you to defer payments while in school

Personal student loans come in different types of packages. For example, Sallie Mae has three loans that could be considered personal student loans:

1.    Signature Student Loan

2.    Tuition Answer Loan

3.    Signature Student Loan for Community College

All of them have their own interest rates and payment plans, so you can use the one that best works for you.

Repayment

The most important thing about repayment is that you do it. If you default (not pay) your school loans, you greatly harm your credit, making it harder to get credit cards or purchase a home, and many times, can be a factor in bankruptcy. Here are the basics to repaying your school loans.

Federal Loans

Federal loans have many flexible options for repayment:

•    Standard: 10 years with fixed monthly payments.

•    Income Sensitive/Income Contingent: if you have inconsistent income (like a freelance writer) or a job   (commission-based sales) that doesn’t make it easy to set a fixed monthly payment, this is for you.

•    Extended: People who borrow $30,000 or more set their monthly payments for up to 25 years.

•    Graduated: monthly payments that increase over time.

Private and Personal Loans

Private lenders have their own options on student loan repayment. Sometimes an extended or graduated plan is possible. It really depends on the flexibility on your personal lender; just remember to always ask about all your options when choosing a repayment plan.

Deferment

Deferment is simply putting the payments on hold for awhile. Depending on the lender, there are a few types and options when it comes to deferring your payments and interest. Below are the most common reasons for deferment:

•    If you’re headed back to school, and attend at least half-time, you can defer you loans and interest. Repayment begins when you graduate or drop below half time.  

•    Job loss/lapse in employment is taken into consideration with deferment.

•    Earning less than poverty level, can qualify you for economic hardship deferment.

Student Loan Consolidation

Sometimes getting on your feet after college is harder than it seems, especially in this economy. Students, or their parents, have a hard time making the monthly payments and don’t know what to do. Student loan consolidation can help make repaying the loans a little easier.

If you have multiple loans, then consolidation can put all the payments into one low, monthly payment so you don’t go bankrupt. When consolidating the two most important things to remember:

1.    You will still have a minimum monthly payment.

2.    The repayment term is extended, which means you’ll be paying a whole lot of interest in the long run.

Lenders

Lenders for Private and Personal Loans:

ACS

Access Group

AES

AFC

AFS

AMS

Bank of America

Bremer

Chase

Chela

Citibank

Comerica

ECSI

GMAC

Great Lakes

Keybank

MOHELA

My Rich Uncle

Nellie Mae

Nelnet

Panhandle Plains

Regions Bank

Sallie Mae

SLFC

Suntrust

US Bank

Wachovia

Wells Fargo

Xpress

Zions Bank

Team USA members receive a Basic Grant of $200.00 per diem when Team USA members participate in official events. Each person can receive up to $1,000.00 in Educational/Ranking Grants per calendar year.

The athletes participating in the Men's World Championships who earn medals will receive a performance grant as follows: Gold Medal - $500.00; Silver Medal - $350.00; Bronze Medal - $250.00.

 

Graduate/doctoral

So you decided you wanted more schooling, and now there’s going to be more debt- if you weren’t lucky enough to have the first time paid by someone else. Grants for graduate students tend to be more subject-based, especially in high need fields (like nursing or engineering).

 

Many times a specific department at an university might have grants available to students applying, or if you’re lucky, a private corporation may pay for some of your schooling. Large companies, like pharmaceuticals or tech fields, recruit undergrads to continue school and eventually work for their company.

Another popular way to get grants is through professional associations. Grants are available through Society of Automobile Engineers and the American Business Women’s Association, and other business and law organizations.

Doctoral Grants

Many times a PhD student gets free tuition as a paid fellowship and assistant professorships, so there are no grants available for these students.