Student Loan Basics

For most people student loans are a necessity to pay for college. As the price of college has dramatically increased in the last couple decades, student loan debt has similarly grown. For the first time ever, student loan debt in the United States now exceeds credit card debt. With billions of dollars changing hands every year, there are a multitude of lenders, laws, and concepts that need to be understood by all borrowers.

Getting a Student Loan:

For most borrowers, the process of acquiring a student loan starts with the FAFSAand the borrower’s college. Ideally, paying for college can be accomplished by a combination of scholarships, grants, and cash. However, if you are here, it probably means that you are in the majority of people who will require a student loan to pay for college.

Most student loans will fall into one of two groups: Federal Government Loans and Private Loans. Click here for a detailed comparison of the differences between Federal and Private Loans. Generally speaking, government loans are superior to private loans due to the better terms, more flexible repayment options, and loan forgiveness programs.

In order to qualify for government loans all students (and their parents if they are under 24), must fill out the Free Application for Student Aid. The FAFSA is not only used for student loans, but is also the basis for determining who gets need based grants. Upon completion of the FAFSA, the Department of Education will determine your Estimated Family Contribution (EFC). This number is based upon household size, income, and a number of other factors. Colleges typically will put together a financial aid package that will attempt to cover the difference between the EFC and the total cost of attendance (this number includes tuition, housing, books, and numerous other expenses).

The amount of federal aid will depend upon your year and school and your EFC. For undergraduate students especially, the amount of Federal Student Loan aid is limited, but these federal loans almost always offer superior terms compared with loans offered by banks and other lenders.

Here are a few tips based upon personal experience that will help you avoid trouble down the road:

-> Sherpa Tip #1: File your FAFSA as early as possible. You do not have to have your taxes file first (you can use an estimate). The early FAFSA filers get the most aid.

-> Sherpa Tip #2: Take out as few loans as possible. The interest really adds up during college and you never know what the future holds. Opting not to live in the expensive apartment might mean that you can afford not to live with your parents when you graduate.

-> Sherpa Tip #3: The financial aid package is an offer, especially for high school seniors who have not yet enrolled in a college. Use one schools offer to get another school to try and put together a better package. Private schools especially will have scholarship and grant funds available to entice potential students to enroll.

-> Sherpa Tip #4: If you must take out a private loan, do it as a last resort. Be sure to do your research on your loan. They are not all created equal. Remember: private loan debt cannot be discharged by bankruptcy and the terms are usually quite harsh. Shopping around to find the best terms is a necessity.

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