As summer comes to an end, many students may find themselves with a gap between their financial aid package and the total cost of attendance at their chosen school. If you’re considering taking out a student loan to cover the balance, it’s important to understand the different types of loans available to you and make a decision that fits your needs.
First and foremost, it’s crucial to remember that student loans must be repaid, unlike scholarships and grants. You’ll be paying off your student loans for years to come, so it’s essential to borrow only what you need and to have a plan in place for repayment.
When you take out a student loan, you typically won’t need to repay the principal amount while you’re still in school. However, you’ll be responsible for paying the interest as soon as your loan is disbursed. The interest rates and terms of your loan will depend on the type of loan you choose.
Federal student loans are generally the recommended option, as they typically offer more flexible repayment plans and lower interest rates than private loans. To qualify for federal loans, you’ll need to file the Free Application for Federal Student Aid (FAFSA). There are four types of federal loans available:
- Direct Subsidized Loans – These loans are available to students who can demonstrate financial need. The federal government pays the interest on these loans while you’re in school.
- Direct Unsubsidized Loans – These loans are available to all students, regardless of financial need. You’ll be responsible for paying the interest on these loans while you’re in school.
- Direct PLUS Loans – These loans are available to graduate and professional students, as well as parents who want to take out loans on behalf of their undergraduate children. These loans typically have higher interest rates than other federal loans.
- Direct Consolidation Loans – These loans allow you to consolidate multiple federal loans into a single loan with a fixed interest rate.
If you need additional funds beyond what federal loans can provide, you may consider private student loans. Private loans are issued by banks and other lenders, and their interest rates and terms can vary widely. Private loans may also require a co-signer, which is someone who agrees to repay the loan if you’re unable to do so.
When deciding how much to borrow for student loans, it’s important to keep in mind your anticipated future earnings. If you plan to pursue a career with a higher salary, you may be comfortable taking on more debt than if you plan to pursue a lower-paying career. However, it’s important to borrow only what you need and to have a plan in place for repayment.
In summary, student loans can be an effective way to cover the cost of attending college, but it’s important to understand the different types of loans available and to make a decision that fits your financial situation. With careful consideration and planning, you can successfully manage your student loan debt and achieve your educational goals.
* A Certified Financial Planner (CFP) is one who is designated as such by the Certified Financial Planner Board of Standards, Inc., and by 25 additional organizations that are affiliated with the Financial Planning Standards Board (FPSB).