Getting an education is hard work and financing that education can be daunting if you don't know how to go about it. Even if you have scholarships and grants (money that is given to you and doesn't have to be repaid), there are still expenses that you may not be able to cover. You may need a student loan.
Sometimes you can borrow the money for your education from the school you're attending, but more often, you'll have to choose a lender. The federal government is by far the least expensive of these! There are two kinds of federal loans (formerly known as Guaranteed Student Loans), the Federal Family Education Loan (FFEL) and the Federal Direct Student Loan (FDSL).
When you obtain a FFEL, you borrow the funds you need from a credit union, bank or other financial institution of your choice and the government guarantees the loan. If you renege on your student loan, the federal government is obligated to repay it. A FDSL loan is borrowed from the feds through the Department of Education.
If you choose to borrow from a bank or credit union, you will be applying for a character (or signature) loan. This type of loan is made when the bank is so certain that the borrower will repay the loan that no collateral is required, merely a signature. You will need either an excellent credit background or be a customer of long standing to obtain a signature loan. The interest rates will be higher than a federal student loan but still much lower than the usual consumer loan.
Generally, you will not have to repay a student loan until after graduation. But what if you can't repay it? Your options are severely limited in such a case. Before 1998, people were sometimes able to discharge their student loans by declaring bankruptcy but this is no longer allowed.
Permanent disability or death are acceptable reasons for not paying your student loan. If the school you're attending closes before you graduate, you may be able to discharge your federal student loan or challenge it.
Closings generally are more common in trade and business schools, as they are smaller institutions and have less financial backing from their alumni. Stricter laws enacted since 1998 have made it extremely difficult to prove great enough financial hardship to have student loans forgiven. If family illness or disability creates hardship in repaying your federal loan, it may be deferred but rarely forgiven.
There are many who believe that any debt is bad debt but borrowing for your education is widely considered good debt. By investing in your education, you will be able to enter a career field that affords you a better standard of living and later, better years of retirement. By borrowing the least amount possible and making a solid plan for repaying the loan, this good debt will be well worth it.
Be sure to investigate grants before you borrow money for your education. A grant is a financial gift that does not have to be repaid. Most grants are relatively small amounts but can take care of expenses such as books and other learning materials. The federal government, schools and private organizations are good places to start investigating grants.
A short story from a graduate that experienced the journey follows. If I knew at 18 what I now at 28, I could have prevented so much disaster from happening. Instead, I owe $150,000 to student loan companies with no escape.
I hope that you will read this before you fall into this trap. At 18 college was a dream come true. I could study without parents to monitor my class attendance, my coffee intake, or my late-night slurpy runs to 7-11 with friends.
I had worked part-time as a teen, but had no savings or significant sense of financial responsibility. I decided to finance a private school liberal arts education in my native Southern California with student loans.
I qualified for some federal money. The rest of it would come from private loans. A few thousand lattes later and some new clothes each semester, the bills started to add up. So it was impeccable timing when the credit card solicitors hit me.
Finance charges and interest rates, what's that? These concepts did not matter at the time to me. I graduated four years later with $150,000 in student loans and $11,000 in credit card debt.
Use your student loan money to finance your education, not your lifestyle. Tuition, room and board, and textbooks are smart ways to spend your student loan money. You'll be paying these loans off for the next ten to 20 years, so use the money wisely.
In addition to student loans, a heavy burden is the credit card debt. In the first year of college the average debt was $2,169 on these cards. At interest rates of 15 to 18 percent, you will be paying off this credit debt into your 30s or 40s.
The way you handle your debt will follow you for many years. If you max out your credit line, don't pay your bills on time and keep collecting credit cards to add ways to obtain money, you'll have a very poor credit score after you graduate.
A budget helps you plan ahead by knowing how much money you have coming in and going out. It gives you the power you need and the peace of mind of knowing where your money is going. Plan to save money while in college so you can spend money on the items you really want when you graduate.
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