Learn about student loans, distinguishing between federal and private options, and understanding repayment strategies. Gain knowledge on making informed decisions for education financing and avoiding potential pitfalls.
Student Loans 101 – The Basics
Student loans are often the first significant financial decision that many people make. They’re seen as an investment in your future—a way to pay for a degree that will lead to a well-paying job. But what many young people don’t realize is that they can also turn into a huge burden.
A student loan is money you borrow specifically to pay for college, and they come with interest rates and terms for repayment. You can get student loans from the federal government or from private sources like banks, credit unions, and even from some colleges themselves.
Now, federal loans typically have lower interest rates and more flexible repayment terms than private loans. The interest rates are fixed, meaning they don’t change over time. Private loans, on the other hand, may have variable rates that can increase over time, and the terms are set by the lender, not the government.
Different types of federal student loans
There are three main types: Direct Subsidized, Direct Unsubsidized, and Direct PLUS loans.
Direct Subsidized loans are for undergraduate students who demonstrate financial need. The government pays the interest on these loans while you’re in school, and for the first six months after you leave school.
Direct Unsubsidized loans, however, accrue interest while you’re still in school. This means you’ll owe more than you originally borrowed when you start repayment. These loans are available to undergraduate, graduate, and professional students.
Direct PLUS loans are available to graduate or professional students, and parents of dependent undergraduate students. These loans have higher interest rates and origination fees.
But here’s a key point – you should always exhaust your federal loan options before even thinking about private student loans. Federal loans offer more protections and flexible repayment options.
Repayment
The standard repayment schedule for federal student loans is 10 years. However, there are also income-driven repayment plans, which cap your monthly payments at a certain percentage of your income. If you’re having trouble making payments, look into these options. Do not just stop paying – that’s a fast track to default, and you do not want to default on a student loan.
Should you even take on student loans in the first place?
My general advice is: no. If at all possible, try to avoid student loans. Look for scholarships, grants, work-study opportunities, or consider starting at a community college.
Remember, debt is always a risk. It’s a risk that the degree will pay off, that you’ll be able to make the payments, that you won’t face financial hardship. Student loans are no exception.
In closing, let me leave you with this. Don’t make the mistake of viewing student loans as the only way to achieve your educational goals. Yes, education is a valuable investment in your future, but it’s not worth a lifetime of debt.
Before taking out any loan, make sure to weigh all your options, understand the terms, and have a clear plan for repayment. And if you’re already in student loan debt, remember, there is always a way out. It may require sacrifice and hard work, but it’s possible.
Lesson Resource
- Student Loans 101 Basics Lesson – Teaching lesson plan for this lesson.
This material has been prepared for educational and informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or investment advice.
