Guide

Student loans fall into the much broader category of “financial aid”; however they differ from scholarships and grants.  Scholarships and grants are a form of “free money” that does not have to be repaid, whereas student loans do have to be paid back.  Student loans come in several different varieties, but usually fall into two main categories:  federal student loans and private student loans.

Federal student loans are provided by the government, and can be paid directly to the school, the student, or the parents.  Federal loans may be subsidized by the government, or unsubsidized depending on the financial need of the student.  These loans typically come with strict terms and conditions and can only be used to pay for education expenses at the school that has approved your attendance.  Education expenses can include: tuition, room and board, books, school fees, transportation, equipment (such as a personal computer), and dependent child care expenses.

Both subsidized and unsubsidized loans are guaranteed by the government, and nearly all students are eligible to receive some sort of federal funding, regardless of financial status or credit rating.  

When federal student loans are made directly to students, they come with a grace period of six months, which means that the student owes no money, and makes no payments, until six months following graduation.  In the event the student does not graduate, he or she has six months to repay the loan following the time he or she became a less than half time student or dropped out.  In the event that a student re-enrolls to at least half time status, the loan will be deferred, however if they drop below half time status again, there is no more grace period.  Federal student loans made to parents typically come with much higher loan limits, and the payments can start immediately, which can provide quick financial relief.

Private student loans are not guaranteed by any government agency, can be made to students or parents, and are issued by banks or other financial institutions.  These loans come with higher loan limits than federal loans; however interest begins to accrue immediately.  Private loans may be used for any type of education expense, and can also be used as a supplement to federal loan programs.  Private student loans also come with a grace period of between six and twelve months following graduation.  While these loans can be quite helpful, they also come with high interest rates, and multiple fees.

Private student loans may be issued directly to the school in a type known as “school channel loans”.  These loans require the school to agree to the borrowing amount and then receive the funds directly.

Private student loans typically have a variable rate of interest, as opposed to federal student loans, which are usually fixed rates.  It should be noted that some forms of private loans require significant upfront fees.  These fees are known as origination fees and are a onetime charge that is calculated by the amount of the loan.  Origination fees can be taken out of the loan or added to the principal of the loan, often at the discretion of the borrower.  Each percentage point of an origination fee gets paid once, while each interest percentage point is calculated out and paid for the life of the loan.  These fees could raise the total cost to the borrower substantially, while lowering the amount of actual money available for educational purposes.  Some lenders offer low interest, zero fee loans, which can offer a significant savings.  

Since fees and interest rates can vary a great deal from lender to lender as well as between loan types, a much more effective way to compare the terms of student loans is to look at the total financing cost.  This will break down all of the information into one clear number that will illustrate exactly how much the loan will cost you until the time it has been paid off entirely.  You will know how the terms will vary, how the fees affect the bottom line, along with how long it will take you to pay off, and how much you will end up paying in total.

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