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Financial Aid: Understanding Student Loans

Jan 13, 2021

As the summer draws to a close, you might find yourself with a gap remaining between your financial aid package and the cost of attendance (COA) at your school. Perhaps you are thinking about a student loan to cover the balance and are wondering what kind of loan to get, or how much to borrow. Navigating the world of student loans can be challenging, so we’re going to spend time looking at some basics that will help you make a decision that’s right for you.

Student Loans 101

Student loans must be repaid. Unlike scholarships and grants, loans are not free. If you take on student loans, you will likely be paying them back for the next decade, or more, and if you fall behind, things can pile up fast. So be very intentional about how many loans you take on and what you plan to use them for.

The principal (the amount you initially borrow) of a student loan does not usually need to be repaid while you’re still in school. You will, however, be required to start paying the interest right away—as soon as your loan is disbursed. Typically, students must start repaying their principal six months after either graduating or dropping below half-time enrollment.

If you find it difficult to make interest payments while in school, note that the government subsidizes (or picks up the tab) on interest payments for certain types of loans. You can also defer interest payments on unsubsidized loans, if absolutely necessary. We’re saying “if absolutely necessary,” because if you choose to go this route, any deferred interest will be added to your loan principal, which can increase the net cost of the loan.

Student loans are meant to cover a range of education-related expenses, such as tuition, books, supplies, transportation, and room and board, at the borrower’s discretion. But, be careful not to interpret this too liberally! You don’t want to still paying for a trip you took that one Spring Break—with interest—many years later.

How much debt should I take on?

This depends in large part on how much you expect to earn after college. If you plan to be a lawyer or an engineer, for instance, you might be comfortable carrying more debt, than if you plan to be a social worker or a dancer. The keys are your anticipated starting salary and whether or not you will enjoy a consistent income.

Regardless of your anticipated future earnings, do not borrow more than you absolutely need. Borrowing money costs money, so you may be better off taking a part-time job to pay for at least some of your expenses, such as textbooks and transportation.

What kind of loan should I get?

There are two types of loans: federal and private. Because the terms tend to be better, we recommend you start with federal loans (for which you must file the FAFSA in order to qualify), and only apply for private loans if absolutely necessary.

Federal loans are issued by the US Department of Education through authorized lenders, such as Navient and Great Lakes Educational Loan Services. These loans do not necessarily require a co-signer, and they generally have more flexible repayment plans and lower interest rates than private loans. There are other potential perks to choosing a federal loan over a private one, such as subsidized interest while enrolled in school and, depending on your chosen career path, eligibility for loan forgiveness programs. There are four types of federal loans.

1. Direct Subsidized Loans are issued by the Department of Education, and students qualify for them by demonstrating financial need. The “subsidized” part is that the federal government will pick up the tab on your interest, as long as you are enrolled in classes at least half-time, or have an authorized deferment any time during the repayment period.

2. Direct Unsubsidized Loans are similar to Direct Subsidized Loans, but you do not have to demonstrate financial need in order to get one, and you are responsible for paying the interest while in school.

3. Direct PLUS Loans are issued to graduate and professional students, as well as to parents who want to take on the burden of the loan, on behalf of their undergraduate student(s). Unless the loan recipient specifically requests a deferral while in school, full repayment begins when the loan has been fully disbursed.

4. Direct Consolidation Loans take all of your existing federal loans and combine them into one, single mega-loan. There is significant debate as to whether or not consolidating debt is a financially sound practice, so this loan should not be considered without consulting a certified financial planner*.

Private loans are issued by private banks and lenders, such as Discover and Sallie Mae. The terms and interest rates for private loans vary widely, and the limits on how much you can borrow are much higher than for federal loans. They may also require a co-signer, which would mean finding someone with good credit who is willing to be on the hook for your loan(s), if you are unable to repay them, on time, and in full.

We know this is a lot of information, but it is important to make an informed decision about student loan debt. Take your time making this decision, and be sure to make full use of your college or university’s financial aid office.


We at HSF wish you the very best in your financial aid journey!
* 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).

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