If you’re a high school senior or college freshman, chances are you’ve heard the term ‘student loan’ talked about a lot lately. But do you really know what they are, or more importantly, what they mean for your future?
In a recent EducationQuest livestream, we sat down with Matt Johnson, senior assistant director in the Office of Financial Aid at the University of Nebraska at Kearney, to break down the essentials of borrowing for college.
What’s a Student Loan?
At its core, a student loan is money you borrow to pay for college. Unlike scholarships or grants, which are often called gift aid, student loans must be paid back, usually with interest.
Federal vs. Private Loans: What’s the Difference?
Federal student loans are offered after completing the FAFSA (Free Application for Federal Student Aid). These loans usually have better repayment terms and don’t require a co-signer.
Private loans, on the other hand, often require a credit check and a co-signer, and interest rates can vary depending on the lender. For context, they are more similar to taking out a car loan.
Matt’s advice? “Start with federal loans. They usually have fixed interest rates and flexible repayment options like income-driven plans or deferment.”
How Much Should You Borrow?
Just because you can borrow a certain amount doesn’t mean you should. The golden rule? Don’t borrow more than your future self can realistically repay. Matt recommends looking at the starting salary in your intended field and ensuring your loan payment won’t exceed 8 percent of your expected monthly income.
If you’re unsure what that number looks like, tools like career salary calculators or a quick chat with a school counselor can help you estimate.
What Can Student Loans Be Used For?
Student loans aren’t just for tuition. They can also be used for:
- 📚 Books and supplies.
- 🏠 Room and board.
- 🚌 Transportation.
- 💡 Personal expenses related to attending school.
What shouldn’t student loans be used for? Vacations, shopping sprees, and other non-education-related expenses.
Understanding Interest: Subsidized vs. Unsubsidized
Federal student loans come in two types.
- Subsidized Loans: The federal government pays the interest while you’re in school.
- Unsubsidized Loans: Interest starts accruing the moment the loan is disbursed.
Wondering about private loans? Assume they are all unsubsidized. Interest typically starts immediately and adds up fast.
Repayment Plans…and What Happens if You Can’t Pay
Repayment typically begins six months after leaving school or dropping below half-time status. But what if you’re struggling financially? You have options!
- Deferment: Temporarily pauses payments, like during grad school or active military duty.
- Forbearance: Suspends payments due to personal hardship, like medical bills or job loss.
- Income-Driven Repayment Plans: These plans set your monthly payment based on your income and can be as low as $0/month.
Alternatives to Student Loans
Before borrowing, explore these options:
- ☀️ Save money now from part-time jobs or summer work.
- 💰 Apply for scholarships.
- ❤️ Talk to family about other resources, like a 529 college savings plan or employer tuition benefits.
Final Thoughts
Student loans can be a powerful tool for accessing higher education, but only when used wisely. Think of borrowing as an investment, not a fallback. With the right mindset and a solid plan, student loans can help open the door to your future success.
By Gage Boardman