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How Do Student Loans Work?

Student loans are an option to pay for college that can be confusing when first approached. Often, students only hear the negative about student loans or they aren’t properly educated when it comes to how they work. Let’s try and clear up some of the confusion for you.

Student loans can be split into two groups:

Federal loans come from the federal government. You have to fill out the FAFSA in order to qualify. There is no credit check when it comes to federal student loans. There are other documents you need to complete, like the Master Promissory Note (MPN) and entrance counseling. The school will also check to make sure you have not defaulted on previous student loans, have an overpayment on grant money or reached the limit on how much you have out in previous federal student loans.

Private student loans come from a bank. This might be the local bank down the street or a national chain. Not all banks will participate in a student loan program. They do complete a credit check and most often will allow you to use a credit worthy co-signer. Since most new students either have no credit or don’t have a long enough credit history, they often will use a parent, grandparent or guardian as a co-signer but it is not limited to just those people. Most applications for private student loans can be done over the internet or phone and can give you an answer right away.

Differences Between Federal & Private Student Loans

While there are differences between the two, the biggest difference is their interest rate. All federal student loans have a fixed interest rate and the federal government (i.e., Congress and the President) sets the interest rate for that award year. College Loan DifferencesNo matter what your credit all students who take out a federal loan are given the same interest rate. Private student loans have a range of interest rates that they work within and use your credit score to help determine your interest rate.

It is important to look at both your options when applying for a student loan. While most students go with the federal loan option, it doesn’t always mean that it is the best for you and your family. Depending on the situation, a private loan might be the wiser choice, especially if you can get approved for the low interest rates that many are offering. Sometimes these interest rates are even lower than the fixed interest rate of the federal loans.

The Process of Taking Out Student Loans

No matter what type of loan you take, the loan process is the same. After you complete all the paperwork for the loans and let them know what school you will be attending, the loan money will get sent to your school to help offset your expenses.

Depending on how much you decided to take out, you may have leftover loan money that the school didn’t need to use to cover direct expenses like tuition or dorm fees. If you have any of this leftover money the school will send it back to you to use for other day to day expenses that come up. Each school’s process for how they handle this extra money is different so make sure you check with your Financial Aid or Bursar office to see about your school’s policy.

One last thing to do is look at an estimated monthly repayment from whatever loan option you choose. Both the federal and the private loans are required to show you this info so it’s easy to find. Think long term, not just for the one year of school. If you are planning on borrowing money for future school years, this can be a good estimate of what your monthly payment will be once you are out of school.

Your Loan Repayment Obligation

Remember, you have to pay this money back so it’s important that you be realistic and smart in how much you plan to borrow. While you may have the options to borrow thousands of dollars in loans, that’s thousands of dollars you still have to pay back when you are done with school!  Just like you compared your options for college, compare your options for student loans. Look at the interest rates, look at the amount you need (not want!) and get an estimated monthly repayment. College is an investment, so make sure you are investing in a way to pay for it that will work for you!

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