Still in College? Here’s Your Comprehensive Guide to Student Loans

College students around the country are hard-pressed to find the funds to pay for books, tuition, housing, food, and (let’s be honest) beer. And when the joy of finals and late-night partying is over, the debt accumulated due to college expenses remains. Many students use student loans to pay for those expenses. However, student loans differ from other types of debt and can be advantageous for students.

Federal loans are beneficial for students because they require no payments until your enrollment drops below half-time status or you graduate. At that point, you are given a six month grace period until you must begin repaying your loans. Federal loans can be either subsidized or unsubsidized.

Subsidized federal loans do not charge interest; the government pays the interest on those loans. Unsubsidized loans, on the other hand, accrue interest that must be repaid by the borrower. Financial need status determines whether you qualify for a subsidized or unsubsidized loan.

Private student loans are another type of loan available for college attendees. The primary advantage of a private student loan is the limit is, typically, much higher. Plus, restrictions on expenditures are much more liberal so students can use the funds to pay for almost any expense they may incur.

Student loans are a great way to help you pay for higher education. You may consider borrowing money to receive a degree a form of good debt because, in theory, your degree will enable you to become more successful than you could be without it. However, if you accrue too much student debt, you will make your entry into the “real world” a painful transition. Borrowing what you need instead of an excessive amount will help you be debt-free much sooner.

A student loan can be a type of good debt. In general, good debt helps you build equity or value. Remember that assets minus liabilities equal equity (or net worth.) For example, you expect that your college degree (B.S. or graduate) will enable you to earn $20,000 more a year for the next 20 years. (For this example, we are working in real dollars and not inflated dollars.) So your new degree and knowledge should earn you an additional $400,000 in the 20 years after graduation. If your costs are $60,000 then it seems like a good investment. If you go 4 years and miss an income of $25,000 per year then that is a further cost of $100,000 for a total cost of $160,000. Even if you borrow most of the total amount at the low interest it still would be a good use of debt.

When considering whether a student loan is a type of good debt, also consider job markets. For example, a master’s degree may secure you a job while a bachelor’s degree might have many fewer job openings. And holding a job may require an advanced degree. But you still need to calculate the total cost including tuition and books; loss of income while studying; and strain on relationships.

If you take a student loan and forego income while in college or at a university, then managing other debts is vital. What are the cash outflows from such debts as credit card payments, house payments, and car loans? Be sure and borrow enough money. And you need to manage all of these debt payments. For example, a student loan of $50,000 at 5 percent interest over 4 years will amount to a total of about $60,800. Try to get a payback period long enough to make the payments after graduation something you can sustain.

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