Understanding Student Loans 101

Laura Shin
Posted

When you think of college, you may think of studying, spring break or late-night pizza in the dorm.

Or, you might be focused less on college itself and more on what it can do for your future career.

But what often comes as an afterthought is the price tag and how you’ll pay for it–which is bad, because college is expensive.

In the 2010-11 school year, the average cost of tuition, fees and room and board was more than $22,000 a year for four-year institutions. (To put that in perspective for any high school seniors reading this, that amount is likely to be more than half of your whole income the first year out of college.)

And the cost of college has been rising fast: The National Center for Education Statistics determined that over a 10-year period, tuition at public institutions increased by 37% and at private institutions by 25%.

Fortunately, you don’t need to pay your tuition before attending your first lecture. Because education is considered good not just for you, but for society, many organizations offer scholarships and grants to help students pay for college. You should try to get as much of this free money as you can, but it probably won’t be enough to cover all your costs. You’ll likely have to take out student loans to cover the rest. Read on to find out what student loans are about, how they work and how you should handle them.

Student Loans in a Nutshell

Student loans are similar to other loans in that you borrow money from a lender and promise that you’ll repay it, with interest. But the terms of student loans differ in one key respect. In other loans, the borrower is expected to begin paying the loan off in installments as soon as the money is distributed. In the case of a student loan, which is made to someone not earning money full-time, the borrower/student is usually not expected to begin repaying the loan until after his/her education is over.

In the broad scheme of debt, student loans are also different from, say, credit card debt, because they are considered “good debt.”Good debt is debt taken on as an investment in your future. It tends to have a low interest rate–6% or less. While it’s never ideal to have debt, at least student loans tend to have low interest rates and represent an investment in your future. After all, a study by the Hamilton Project found that a $100,000 investment in college at age 18 yields a greater return than an equal investment in bonds or stocks. “Bad debt,”Bad debt is debt with a high interest rate, such as 6% or more, and it’s often not taken on as an investment in the future. such as credit card debt or a car loan, offers no such payoff.

While taking out a student loan for college should pay off, you should still be aware that you’re taking on debt. For that reason, be as careful about taking on this kind of debt as you would any other debt. As you’ll see shortly, some types of student loans are vastly superior to others.

Why It’s Important to Understand Student Loans

It’s easy to have a relaxed attitude toward student loan debt since so many people accrue it. But today the burden of student loans is reaching such a crisis point that people are questioning whether we are in a college bubble in which college is overhyped and overvalued, burdening former students with high debts that offer little return for the investment. For that reason, you should know the following when you take them on:

  • Student loan debt in the U.S. is at an all-time high of $1 trillion, outweighing credit card debt.
  • More than four million borrowers have student loan debt that exceeds $50,000, and 185,000 of them have more than $200,000 in debt.
  • Almost half of all graduates will delay buying a home because of their student loans, and almost a quarter will delay having children.

(To find out more about the student loan crisis, check out our infographic.)

But our goal here is not to scare you off college,which is a very worthwhile investment in terms of your life-long earning potential. Rather, we’ll teach you the best way to take out student loans so they provide you with an important boost without weighing on you in the future.

  • Tony

    We were offered a Parent Plus Federal loan in my son award letter from the college he decided to attend. The rate on this loan is 7.9% and it has a 4% loan fee. The loans from the private institutions are half (for a fixed rate) and no fees. Is it still worth it to get the federal loan vs the private loan? Thanks.

  • Lauren

    Where do I go to obtain a college loan?