Financing Your Education

A student loan is exactly what it sounds like – a loan given to students to finance their studies. This is most common for college or university students, but also works for trade schools and other vocational studies.

Most of the time when a person takes out a loan, they are using it to invest in an asset that they will use later – like a mortgage for a house or a car loan for a car. With a Student Loan, you are investing in yourself. The gamble you make is that the cost of the loan (plus interest) will be less than the extra income you’ll earn with the new education.

Before You Start – The FAFSA

The FAFSA, or Free Application for Federal Student Aid, is one of the first places to start when planning how to pay for higher education. The FAFSA is used to determine your eligibility for different types of federal student aid and may also be used by states and schools when awarding their own financial aid.

Before starting the FAFSA, gather information you may need, such as your Social Security number, tax returns or W-2s, bank account balances, and a list of schools you are considering. Dependent students may also need information from a parent. Students and required contributors complete their respective sections and submit the FAFSA through StudentAid.gov for each aid year they want to receive financial aid.

After your FAFSA is processed and you are accepted to a school, the school will provide a financial aid offer showing the types of aid available to you. These may include grants and scholarships, which generally do not need to be repaid; work-study, which allows eligible students to earn money through work; and federal student loans, which must be repaid with interest. A financial aid offer may also include a Parent PLUS Loan, which is an optional federal loan taken out by a parent.

Review the financial aid offer carefully. Grants and scholarships are sometimes called gift aid because they generally do not need to be repaid, while loans are borrowed money and should not be treated as free financial aid.

Finding Local Support

Federal financial aid is not the only source of help available to students. Before borrowing, look for grants and scholarships offered closer to home. Search your state or district Department of Education website, community foundations, local employers, civic and community organizations, and your high school guidance or college counseling office. Some local scholarships receive fewer applications than large national programs, so researching opportunities in your community can be worthwhile.

Georgia Students: HOPE and Zell Miller Scholarships

Georgia students should also investigate the HOPE Scholarship and Zell Miller Scholarship, which are merit-based state financial aid programs. Eligibility depends on requirements such as academic performance, including GPA and applicable coursework requirements. Because scholarships do not generally need to be repaid, qualifying for state aid can reduce the amount a student needs to cover through federal grants, student loans, or other sources.

If you live outside Georgia, check whether your state offers a similar merit-based scholarship or grant program.

Types of Student Loans

There are a few types of student loans available for students in the United States, depending on their needs.

Federal Loans

Federal student loans can include Direct Subsidized Loans and Direct Unsubsidized Loans.

With a subsidized loan, the federal government generally pays the interest while an eligible student is enrolled at least half-time and during certain other qualifying periods. Subsidized loans are based on financial need, and the amount a student can borrow is subject to federal limits.

With an unsubsidized loan, interest begins accruing after the loan is disbursed. The borrower is responsible for that interest, including interest that accrues while attending school.

Federal student loans are generally worth considering before private student loans because they typically offer fixed interest rates, access to federal repayment options such as income-driven repayment plans, and no credit check for most undergraduate Direct Loans. For students who qualify for subsidized loans, having the government cover interest during eligible periods can also reduce the overall cost of borrowing.

How Much You Can Borrow

The amount you can borrow with a federal loan is determined by your school – schools work with the Department of Education to ensure students do not over-borrow on federal loans (meaning borrow more than the minimum it should cost to attend school).

Source: https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized

You can borrow the less in your first and second years because of the risk of dropping out – the program is designed to prevent students who drop out of college from being saddled with massive debt that they are unable to repay.

If You Are A Dependent – PLUS Loans

If you are still a “dependent” of your parents for tax reasons, you can borrow even less, as it is assumed your parents should be helping you out with some of your school costs if they can claim you on their taxes.

But if your family already has financial need, your parents can obtain what are called “PLUS” loans. With a PLUS loan, your parents would take out a student loan on your behalf to help pay for your school. The difference is that your PARENTS are the ones responsible for paying back the loan, not you.

PLUS loans are not very popular – their interest rate is much higher than direct student loans, and parents in families with financial need are not usually able to take on the additional debt burden.

Private Student Loans

Private student loans are issued by other private banks and lenders. The interest rate is determined by the general market interest rate. Sallie Mae is the largest provider of private student loans – if you need student loans to finance your education, you will probably work with them at some point or another.

Private Loan Risks

Student loan debt in the United States has skyrocketed, which makes some parts of private student loans controversial. The biggest drawbacks of student loans include:

• Too easy to borrow too much – college students are not celebrated for their skill in personal budgeting. Private student loans let students borrow more money – and money in the bank is money that can be spent. It can be hard to remember when you’re taking out a loan that you will eventually need to pay it back, and over-borrowing as a student (and accumulating interest the whole time you’re in school) is a good way to start your career saddled with a huge amount of debt.
• Discourages a mix – Private student loan providers usually encourage students to get all of their student loans in one place to simplify the process every school year, but this means you might miss out on better interest rates for part of your debt that you might have gotten with a federal loan. Mixing federal and private loans is a lot more work, but it can save a lot of money in the long-run.
• Flexible terms can be confusing – all of the flexible repayment options makes it sound easier to manage, but it can be challenging to know when you first sign up for a loan which path makes the most financial sense for you. This can be an extra risk.

At the end of the day, taking private loans is still a great way to finance your education, but it takes good financial discipline on your part to avoid graduation day saddled with debit.

Risks of All Student Loans

Whether you have a Federal loan or a Private loan, there are some unique risks associated with student loans.

The Risk Is On YOU

With a student loan, you are investing in yourself – the education you receive with the loan money should increase your future income. Unlike a house or car (which you can sell if you get behind on payments), if you do not complete your education, you get no benefit and all of the debt.

This means that before you take out any student debt, you should be sure that you can commit to finishing school and obtaining your degree. Ideally, you should also do some career research to see what kind of starting salary you will earn after you graduate when you plan how much you can borrow. Most undergraduate students wildly over-estimate how much they will earn after graduation – you can find estimates per major through surveys conducted by the National Association of Colleges and Employers (https://www.naceweb.org/).

Bankruptcy Does Not Work

If you rack up credit card debt or other types of loans, you always have the option of bankruptcy relief. But bankruptcy works by selling off your assets, negotiating with lenders, and coming out with a payment plan.

Because student loans are based only on the skills and credentials you should have earned while in school, student loan debt does not qualify from bankruptcy protection – there is no escape, and you are stuck with it until you can pay it off.

Student Loan Best Practices

If you are considering higher education and might need student loans, follow these steps:

1. Complete the FAFSA. Start with the FAFSA process described earlier to determine what grants, scholarships, work-study, and federal student loans may be available before turning to private loans.
2. Look For Scholarships. Sallie Mae has a scholarship search tool, and others exist as well. Scholarships are another source of free money, and most scholarships receive very few applications because students never bother to apply. Spending a few hours searching and applying for scholarships can save off thousands of dollars from your final loan amount.
3. Start With Federal Loans. Apply for federal loans first, especially subsidized federal loans. It takes a bit more work every year to get funded, but the lower interest rate will save big money when it comes to repay. You cannot apply for federal student loans directly – after you complete your FAFSA, your college or university should present you with your federal loan options.
4. Minimize Private Loans. Most students end up needing some private loans to finance their education (particularly living expenses), but this should be the last piece you apply for once you’ve already shaved off as much as you can with the other options.

After Graduation – Refinance

After you graduate from school, investigate options to refinance your student loans. By the time you finish school, you will probably have several different student loans (mixes between Federal and Private, different periods and interest rates, ect), which can be tricky to manage.

However, there are many companies set up specifically to refinance your student loans after graduation, usually paying you a loan transfer bonus, and potentially a lower interest rate. Refinancing companies want to see that you’ve started work (and how much you’re earning) before they give you options, but this is an often over-looked way to save thousands more dollars on your total debt burden right out of school.

Argumentative Writing: Is Student Loan Debt Worth It?

Is taking on student loan debt to pay for postsecondary education worth it?

Use what you have learned in this lesson, along with reputable sources, to develop an argument.

1. Make a claim: State whether you believe taking on student loan debt for postsecondary education is worth the cost and under what circumstances.
2. Consider a counterclaim: Explain a reasonable argument someone could make against your position.
3. Use evidence: Support your argument with information from reputable sources, such as the College Scorecard, Bureau of Labor Statistics (BLS), National Association of Colleges and Employers (NACE), or Federal Student Aid. Consider factors such as education costs, expected salary, career opportunities, interest, and total debt.
4. Conclude: Briefly explain why the evidence supports your position after considering both the potential benefits and risks.

You can also use the career and starting-salary research discussed earlier in The Risk Is On YOU section when developing your argument.

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