Student loans are designed to help college student pay for tuition, books, and ordinary living expenses. While other types of loans have substantially higher interest rates, the interest rate for student loans for students on financial aid is much lower, and repayment can be deferred while the student is still in school.
The United States offers two types of student loans for students on financial aid – federally-funded student loans (called government-sponsored enterprise, or GSE) and privately-funded student loans. Student loans are generally part of a school’s financial aid package, to be used in conjunction with grants, scholarships, and work-study programs.
While most college students qualify for student loans for students on financial aid, the amount they can borrow varies on several factors, including:
- Whether you are dependent or independent;
- Your parents’ income level (if dependent);
- You personal income level (if independent);
- Whether you are applying for an undergraduate or a graduate degree program;
- Your credit history; and
- The amount you or your parents will be able to contribute.
The amount of money the student can borrow is determined by the institution offering the loan, but the student is not bound to take that much money. In general, the student should borrow enough to pay the following expenses:
- Books; and
- Living expenses.
Living expenses are often difficult to estimate, but might include:
- Car payments; and
Student loans for students on financial aid have two major advantages over more conventional loans:
- They have lower interest rates: the interest rate on student loans is usually at least two whole percentage points lower than the going rate for other types of loans; and
- They have easier repayment terms: repayment can be deferred anywhere from six to twelve months after the student is out of school, regardless of whether he or she has completed the degree program.
If repayment is a hardship, students can often have their repayment period extended so that monthly payments decrease (though the total amount of interest increases). Students can also apply for an income sensitive repayment plan (in the case of underemployment) or a hardship deferment (in the case of unemployment or illness). Students can also consolidate student loans into one low monthly payment.
Students should be aware of the various criticisms leveled at student loan programs, including:
- A sense that loan terms were never clearly defined before consummation;
- Burdensome monthly payments based on inaccurate expectations for take-home pay;
- Missed payments which lead to automatic wage garnishment;
- The inability to charge off student debt in the bankruptcy process; and
- Unyielding lenders in the face of borrower hardship, such as unemployment or illness.