Demystifying loans

demystifying loans

Loans, Loans, Loans

You’ve probably heard of them at some point in your life. Chances are that the things you’ve heard about loans are terrifying. Someone has probably told you to avoid them like the plague because they will ruin your life. Those people aren’t totally wrong but also, they aren’t totally right! Get ready to hear some things you’ve never heard about loans because in this letter, we are demystifying loans!

what are loans

Loans, specifically in the college/university setting, are financial aid money given to students to cover things like tuition, housing, meals or any indirect costs associated with attending college/university.

Loans are controversial because they are the only sources of financial aid that MUST BE PAID BACK, and WITH INTEREST.

Most students are offered some form of loans in their financial aid offer letter and depending on the type of loans, they accumulate interest at different rates and times. Students usually have to start paying loans back through monthly increments six months after graduation or if no longer enrolled in college/university.

Types of Loans You May Be Offered

Subsidized Loans

These loans are for undergraduate students who exhibit financial need on their FAFSA. It is determined by the cost of attendance minus the expected family contribution. Subsidized loans are unique because they do not accrue interest if you are at least a half time student. Because of this, if you must take out a loan, this is the most preferred loan amongst undergraduate students.

Unsubsidized Loans

These loans are for both graduate and undergraduate students. Unsubsidized loans differ from subsidized loans in two ways. First, unsubsidized loans are not determined by financial need but rather the cost of attendance minus any other financial aid student already has (i.e scholarships, grants, etc). The second difference is that these loans start to accrue interest at the moment they are disbursed, no matter if you’re actively enrolled in school or not. It will continue to accrue interest until paid off.

Parent PLUS Loans

Parent PLUS loan is a form of unsubsidized loans given to the parents of dependent undergraduate students. This loan is unique because though students may be offered the loan on their financial aid offer letter, only the parents of students can apply for this loan. Parents must send in an application and get a credit check to be approved for the loan. Once approved, the loan is paid out to the parents to then be paid to the students’ expenses. Interest on this loan accrues at the moment it’s dispersed.

why get a student loan

The cost of college can be very expensive. Sometimes, scholarships and grants do not cover the full amount to attend college. So the biggest reason to get a student loan is that it helps you afford, focus on, and graduate college without the burden of financial obligations.

should you take out a loan for school?

The answer to this depends on your unique circumstances. There is nothing inherently bad or wrong about getting a student loan. Many people have some form of a loan. Even though a loan may look scary, if you need to take them out, there are ways you can plan your repayment and be an informed borrower. Below are typical cons of getting a student loan and pros to help you work around them.

Loans Cons & Pros

Interest Rates

Con: As you know by now, loans come with interest rates. Interest rate is the cost the borrower must pay for borrowing the loan. This means that you will not only have to pay back the principal amount (amount borrowed) but you will also have to pay back the interest that has accrued over the months and years. This is what makes student loans expensive and difficult to pay back in a timely manner.

Pros: When borrowing the student loan, find out exactly what the interest rate is on the loan. Typically, federal and state loans interest rates are fixed. This means they will not decrease or increase at any time. This is good for the borrower because it makes it easier to plan out your payments.

Expensive Monthly Payments

Con: With interest and principal balance, monthly student loans can become impossible for some graduates to pay. This can result in defaulting on loan payments which can then negatively affect the borrower's credit score, making it harder for the borrower to get any other loans for future life necessities.

Pros: When you borrow student loans, you want to make sure you are aware of all of your repayment options. Something some borrowers may not be aware of is that Federal loans offer ranges of repayment plans and options according to the borrower’s income and basic cost of living. So for new graduates who may not make enough income to cover their student loan payment, speaking with their loan servicer can help lower monthly payments, decreasing the risk of defaulting on payments.

Credit Score

Cons: As previously mentioned, defaulting on your student loan can significantly decrease your credit score. Your credit score is important because it allows you to make other important purchases later on in your life.

Pro: For undergraduate students who are just starting out building credit, student loans can be a huge help. Making your monthly payments on time can increase your credit score. If you borrowed an unsubsidized loan, making payments on the interest while you’re still in school could also increase your credit score before you head out into the workforce.

how much loans can i take out

There is a limit of how much loan students can take out yearly. Typically, students can only take out the amount that equates to their total cost of attendance. But just because you can take out that much, doesn’t mean you should. Do not be afraid of loans but definitely take out as little loan as necessary to get to your college/career goals.

Hope all of this information on loans helped! Reach out to your counselor or adviser if you need more help figuring out student loans!

Page updated

Report abuse