Financial Aid 102

Loans! They can be very confusing for some people. First you need to learn about some basic personal finance concepts. Interest is a fee associated with the cost of a loan. Generally you pay a certain percentage on top of the loan. This additional money is often added to the principal (or original loan amount) and compounded (a method where interest is then calculated based on the new total). There are many loan interest calculators on the internet.

As a little assignment go to a loan calculator website (you can find on easily by doing a Google search). Remember in the last post we had the hypothetical figure of an $18,000.00 gap in expenses. When on the website put in the loan balance, and term (length of time you will be making payments in years), as well as other information that applies to you. Do you see how expensive loans can be? Play around with your estimated loan amount, interest rate, and minimum payment and look at how much money you will be paying in interest and in total for your loans. Ask yourself if this minimum payment will be realistic for you and if you are willing to pay that much money in additional interest and loans.

As I mentioned in the previous post there are three types of loans you will be offered in your financial aid package. The subsidized loan is the best of the loan options offered to you. While you are in school no interest is added to your subsidized loan (this keeps the overall cost of the loan lower for you). unsubsidized loans add interest to your loan balance while you are attending school (this means while you are in school the loan amount grows because of interest). The third option isn’t really a loan for you; it’s for your parents. The PLUS loan is a loan your parents take out to pay for your education. These loans are generally at a lower interest than other loans available. If your parents can’t (as in they were denied) or refuse to take out a PLUS loan and you have decided to use loans as a method to pay for school, you can go to the financial aid office and they can adjust your financial aid package (this usually means they find more subsidized or unsubsidized loans for you).

There is another option for student loans out there called private loans. People usually get these loans from their banks or other third parties. Private loans should be avoided at all costs. Usually these loans have variable interest rates which mean the interest rate can go up and down depending on the financial markets. This can create giant unaffordable monthly payments while you are in school or after you graduate.

You see the loans offered in your financial aid packages come with certain protections for students who use them. There are interest rate caps (which mean that even though the interest rate may not be fixed, it will not go above a certain interest rate). These caps protect students and parents from giant unaffordable monthly payments. Federal loans also have multiple repayment options to help you pay off your loans. These options can be dependent on your income, can increase over time, or they can be a fixed amount each month. Also if you get into financial trouble there are programs where you can delay or pause repaying loans. Forbearance is when you get to stop making payments on your loans, or pay a reduced amount on your loans for up to one year. During forbearance interest is still accrued and added to your principal to be compounded, but you do have the option of paying the interest. Deferment is awarded when you are experiencing economic hardship (you must meet the federal government’s standards of economic hardship), or you are in school at least part time. Deferment postpones loan payments and interest is not accrued. If at any point you are having trouble repaying your loans contact your loan servicer (the people who send you your bills) and ask about forbearance and deferment. Don’t just stop paying your loan without telling them about your issues because it will damage your credit score (more on credit scores in a later post).

Private loans don’t always offer such generous programs to assist students in repaying their loans as federal loans do. There are many horror stories of students being saddled with $2,000.00 monthly loan payments and they only take home $1,500.00 a month and the private lender won’t work with them. You see Student Loans aren’t usually discharged in a bankruptcy. (A bankruptcy is a legal proceeding where people with extreme financial hardships, mainly debts, ask the court to get rid of their debts, or significantly reduce their debts into manageable sums. Bankruptcy can also include a court ordered renegotiations of the terms of a debt so that the person who owes the money has more time to repay the money and gets to pay less in interest or possibly no interest). Student loans are often left the same even if a person files for bankruptcy (there are very special circumstances where this is not the case, but you would need to talk to a lawyer about that). So if you take out a student loan whether it is from the federal government or a private lender you are stuck paying that loan back.

Loan repayment can also take a very long time. If you decide to take out a large sum of money over your college career the payments can last for 20 years (or more if you borrowed from a private lender). Generally speaking loans are a last resort in the world of paying for college. Other options like grants, scholarships, working, and other programs I will cover later are better. I understand if you feel as though loans are your only option. I have had to take out a large sum myself, but that was only after carefully thinking about my options. I have found an alternative way to pay for my loans.

There are loan forgiveness programs that help those who graduate with a four year degree pay off their student loans in-part or in-full. These programs often have certain requirements. Some of the most common programs are the loan forgiveness program for teachers and the loan forgiveness program for public service. Both of these programs require working either in teaching or a public service field (i.e. police officer, teacher, fire fighter, local, state, or federal government, etc.). After working for a specific period of time, and staying current with your loan payments during that time, some or all of your loans will be forgiven. The links to these popular loan forgiveness programs will be in the useful links tab at the top of the page.

These are by far not the only loan forgiveness programs out there. If you know what you are going to do for a living after you graduate search for these programs. Sometimes working in rural, remote, or impoverished areas in a needed specialty (like a medical doctor or a dentist) can also provide loan payment assistance or loan forgiveness. You will have to do your homework to find these programs, but they are out there.

The main thing I want you to take from this posting is that loans are serious business. You need to carefully choose how much and from whom you will be borrowing. Don’t take out money you don’t really need because it will haunt you. Owing a large amount of money in student loans will make it harder for you to buy a house when you want to, have children when you want to, or afford other major expenses later in life. Every dollar you take out now is going to be at least two dollars you have to pay in the future when all is said and done. Don’t steal from your future self because you want to go to Cancun on Spring Break or go on shopping sprees.

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