Student Loans/Financial Aid/Scholarships
By: Jock Zollinger
Student Loans: Establishing what you should know about your student loans
So, you want to go to college? That’s great! Awesome even! The best reason for going to college is the hope that you will get a degree and then get a job in that said degree. Pretty simple, right? I wish. If everyone knew what they were going to do when they were still in high school, then maybe the percentage of college students who changed majors wouldn’t be as high as 75%1. Why talk about this? Well, changing your major is a leading contributor to causing students to extend their stay at any college for more than the typical 4-year mark. With that being the case, it is quite important to take note of the financial plan that goes into studying at any college or university for any amount of time for that matter. Will your parents be paying for it out of pocket? Will you be paying? How are the funds generated? Through student loans? A 529 education savings plan? These are several questions that you may have already considered and answered on your own, which is great to hear! Knowing where you stand financially while paying for college is great to know even if your parents are the ones handling all the paperwork. Regardless of where you are, it can be very useful to educate yourself on not only what kinds of student loans are out there, but the terminology used through the student loan process.
Federal vs. Private Loans
The first thing to consider with student loans is the sources of getting them. Federal student loans are from the government. The amount that each student will receive is determined by the Free Application for Federal Student Aid, better known as FAFSA. This takes many factors into account from your parents’ records, if you are considered dependent, to come up with a suitable idea of how much the federal government can lend you based on what they think your parents will contribute towards your schooling. In many cases, students end up paying for their schooling through loans anyway without parental funds, so it becomes an interesting case to only get a certain amount from the government when you may still have more costs for schooling coming in. This is where many can turn to another federal loan option which is known as Parent PLUS Loans. These are unsubsidized loans (explained further below) that are made to parents of dependent undergrad students2. is often shown to be the best route for students to take as it offers more favorable terms than that of private loans, such as flexible repayment options3
Private student loans are another route that students can take with their loans. They are often higher in interest rates along with higher borrowing limits than that of federal loans3. Funded through banks and credit unions, private student loans become a better last resort than first resort when thinking about getting the funds to pay for college. If your parents do not want to go through with Parent PLUS loans, then private student loans become one of the next options to choose from.
Fixed vs. Variable Rates
Although quite short to explain, I find it crucial to understand the difference between these two rates when it comes to any sort of plan with your money involving interest rates. Your best friend, when it comes to interest rates on student loans, are majority of the time going to be your fixed interest rate loans. Federal loans are all going to operate through this fixed interest rate which makes the process of making a repayment plan a whole lot easier for both you and the government. Any time you run into a variable rate, you subject yourself to some uncertainty and that can become a stressful thing over time if you see one of your loans increase in interest rate over time.
Variable rates can change over time. Makes sense. Now these rates are very much affected by current market conditions. Think about inflation being high. That will increase the index in which your variable rate is being calculated and will in turn increase your interest rate. In summary, I have found that fixed rates are the way to go as they can be easily looked at to determine the future amount that you will have to pay for your student loans4.
Subsidized vs. Unsubsidized
Now the last subtopic of student loans that I will be going over will be the difference between subsidized and unsubsidized student loans. Both will be given out through federal student aid, however, the FAFSA will specifically determine how much of each type of loan you will be receiving. Subsidized loans are rewarded first and only for applicants that qualify through the measures set by the government. They are quite useful for anyone not planning on paying off their debt until after college as they will not be accruing any interest in the background. The same could not be said about unsubsidized loans.
Unsubsidized loans get their charm from the fact that as you are still in school your loans are considered in “deferment.” This just means that you don’t have to start paying for your loans just yet. Well, while you are in that state, unsubsidized loans like to start accruing interest so that way when you are done with school and past the 6-month grace period, you are not only greeted by the principal balance that you took out but also the interest that had accrued up until that point while you were in deferment. Yay. Case in point, if you decide to start paying off any sort of loans while you are in school, stick to knocking out those unsubs before you get to the subs.
The world is full of options in life and sometimes there are enough fancy words thrown our way to help confuse the decision process even more. If this can help clarify some of those fancy words, then that is all I can ask for. In summary, a federal fixed subsidized loan is your best bet at the best deal for you student loan-wise, however, not everyone can take full advantage of that as their only source of loans, so it is important to be educated on the other options available. For more information on the topic of student loans, please book a session with one of our Peer Financial Coaches here at Liberty University.
