How Student Loans Work

As college tuition grows ever higher, more and more students are turning to student loans to offset part or all of their education costs. However, you may not understand how student loans work. They are like loans for any other purpose, but with a few twists.

Here’s how student loans work:

To receive a student loan, your first step is to fill out the FAFSA, or Free Application for Federal Student Aid. This form includes your financial information, and usually that of your parents. It will be used to determine which college aid programs you are eligible for, including grants, loans, or scholarships, either from the government or from the specific school you plan to attend. This form should be filled out in the Spring before you plan to attend college.

Student loans from the government are available to almost all students, regardless of your income or credit rating. As the result of the FAFSA, each school to which you’ve applied will send a customized aid package. This will include information about the loans available to you, as well as any grants or scholarships (free money) that you have been awarded.

You do not have to accept all of the loans you have been offered; it is up to you to determine how much you will need to borrow through student loans to fund your education. You may be offered the Perkins Loan, which generally carries a very low interest rate for low-income students, or a Stafford Loan, for which most students qualify. On both of these loans, your interest is subsidized while you are attending school, and you will not start the first payment until after graduation. PLUS loans may be offered to your parents; these allow the borrowing of larger amounts of money, which can be useful if you plan to finance the total costs of your education, and your parents are willing to accept the loan. If you still do not have enough loan money, you can also pursue private loans, through individual banks. For these, you will need a suitable credit rating, and you may need a co-signor.

In most cases, the loan money will go directly to the college for payment of tuition, room and board, and related expenses. In a few cases it will be given directly to the student, and you will be responsible for budgeting your money wisely.

Although loans may seem like the ideal way to make it through your college years without financial stress, don’t forget that they do need to be paid back. Do not borrow more than you’ll be able to pay back once you graduate, and don’t borrow more than you need or spend the money on non-education expenses. If you do not complete your degree, you will still owe back the money that you have borrowed.

After you graduate, you will typically need to begin loan repayment within six months. However, this can be postponed for a variety of reasons, including continuing education or your financial situation. This is called a deferment, and it does not affect your credit rating. If you have taken several loans over the years of your college education, you may wish to consolidate them, which can lower your monthly payments. One important thing to remember about how student loans work is that they will not go away if you declare bankruptcy; these student loans will exist until you have paid them off.


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