It’s no secret the cost of education is rapidly increasing, far faster than even the pace of inflation. The College Board shows the average cost of undergraduate tuition and fees for the 2013–2014 school year was $30,094 at private institutions. Meanwhile, state residents paid $8,893 at public colleges; and out-of-state residents paid around $22,203 at public universities.
Those figures don’t include the costs of room and board and additional expenses such as books, supplies and travel back home. Plus, these numbers are just averages, meaning certain schools can surpass even those numbers. And then you have to consider that these costs will likely be multiplied by four years!
It’s not surprising that student loans are becoming a part of more and more young people’s lives. If your child or you are considering using student loans to finance an education — either in whole or in part — here are some important things you need to know about them.
Government vs. Private
Student loans mainly come in two forms: Government or private. For U.S. citizens, the U.S. Department of Education manages loans funded by the federal government. These can be subsidized or unsubsidized and are explained below in more detail.
Private loans are usually used when government loans don’t offer enough financial support for a student’s particular situation. In this case, the lender is a private institution, like a bank, and the interest rates on the loans are determined based on the borrower’s creditworthiness. Rates are typically higher than those for government loans.
Government Loans – Subsidized vs. Unsubsidized
A subsidized loan is only available to undergraduate students with demonstrated financial need. While the student is in school, and during the six months after graduation, the government pays the interest on the loan on the student’s behalf.
Unsubsidized loans are available to both undergraduate and graduate students, regardless of financial need, and the interest due on the loan must be paid by the student borrower. The interest can either be paid while the student is in school or it can accrue on the loan until the borrower starts paying it back after graduation.
The amount of money you can borrow via federal government loans is determined by both your school and by the limits imposed on these loans by the Department of Education. To determine the maximum amount for which you are eligible to borrow each year, as well as current interest rates, explore the chart at studentaid.ed.gov. (Interest rates on government loans are independent of a student’s credit history.)
The Free Application for Federal Student Aid, commonly known as the FAFSA, is a form that students must fill out in order to be eligible for government loans. Most schools also use information on the FAFSA to determine eligibility for their own scholarships, grants and loans. In order to fill this form out, it’s best to have the recent tax returns of both the student and his parents, if he is claimed as a dependent on their paperwork.
What if I Can’t Repay?
Student loans must be repaid and are among the most difficult loans to have discharged, even if you declare bankruptcy. You take extreme care when borrowing to pay for school. Only borrow as much money as you need and have a solid plan for repayment in place far in advance of when your payments come due. Student loans can follow you for a long time, hindering your future financial security, so be sure that decisions you make in your younger years don’t negatively impact your adult life.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].