What Are Student Loans?

By information.com — Published September 19, 2017

What Are Student Loans?

Overview

A student loan is a loan taken to pay off expenses related to higher education, such as college tuition, books and on-campus housing.

Start off by understanding the cost of attendance (CoA) that includes the full costs of attending a particular university, including transportation and personal expenditure. Determine how much you can afford to pay or the amount your parents are willing to pay, and fund the rest with a student loan.

What kind of student loans are available?

Government loans: Federal student loans have low interest rates but they may not cover all your expenses and impose a limit on how much can borrow. Many are intended for low-income families, though there are quite a few that don't consider your financial situation.

How do you get a student loan from the government? First understand if you meet basic federal eligibility requirements and the type of aid you can potentially receive by filling out a Free Application for Federal Student Aid (FAFSA) application. After your application is processed, you will get a financial aid offer from your university, which you can accept or reject.

There are three types of federal student loans: direct subsidized loans linked to financial needs; direct unsubsidized loans not linked to financial need and not based on your credit or your parents'; and direct PLUS loans, which are unsubsidized loans based on your or your parents' credit.

Private student loans: You can apply for a private student loan at a bank of financial institution offline or online. It is often co-signed by a parent or a credit-worthy well-wisher. A parent loan is another option where a parent or credit-worthy individual takes out a loan to finance your college education.

What to keep in mind when applying for student loans online:

  • Many private student loans have variable interest rates that may start at a low rate. However, there is always a risk that rates may increase in the future. It is safer to opt for a fixed rate or convert your variable rate to a fixed rate loan.
  • Lenders will pull out your credit report as well as that of your parent/co-signers to assess the rate you're qualified to receive
  • It is best to borrow the amount you need and not the maximum you can get.
  • Your parents could get a pretty competitive tax deduction on the student loan interest they pay annually.
  • It is extremely challenging to have a private student loan discharged in bankruptcy. Aim to pay off your student loan quickly by making larger payments (such as writing two checks a month instead of one), getting a part-time job while attending college, and maintaining financial discipline.

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