Whether you are entering, enrolled or graduating college, student loans can be overwhelming. While there are numerous options to help ease the burden, research and adhering to terms is of utmost importance.

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Any student, regardless of income, who wants to be considered for federal, state and school financial aid programs should complete a FAFSA form at studenaid.gov. This includes grants, scholarships, work-study funds and loans. 

Federal vs. private loans. Federal loans are funded by the federal government while private loans are funded by various financial institutions. Federal loan terms are set by law and include many benefits such as fixed rates and income-driven plans1 while private loans may have higher interest rates and no payment flexibility. Private loans may also require payments to start while the student is still in school, whereas most federal loans provide a six-month grace period after graduation, leaving school or dropping below half-time enrollment to start paying. Depending on the type of federal loan, interest will start accruing from the initiation of the loan.

Federal unsubsidized vs. subsidized loans. The main difference between direct subsidized and direct unsubsidized student loans is when the interest starts to accrue. With direct subsidized loans, you will not be charged interest while enrolled in school. Conversely, direct unsubsidized loans start accruing interest from the first day of the disbursement of the loan. Other differences between the two federal loans are the amount you are allowed to borrow, your year in school and if you are considered a dependent.

Parent plus loans. Parents have the option to help pay for college with parent plus loans. Like student loans, they may be obtained by the federal government or a private institution. Parent plus loans have higher interest rates and depending on where the loan is originated, less flexibility with deferment and payment options. 

Payback time. With federal loans, students will receive an email notification offering a variety of payment plan options prior to the payment start date. These options should be considered carefully and terms adhered to. If the student cannot make a timely payment, it is imperative that they contact the federal loan provider and make arrangements; otherwise, a missed or late payment may default the loan. If a student loan is defaulted, that status will be reported to national credit reporting agencies and may damage the student’s credit rating and future borrowing ability. Also, the government can collect on loans by taking funds from wages, tax refunds and other government payments.2

Private loans are extremely hard to negotiate. There are several institutions that will offer loan consolidation, however, be very careful when looking to consolidate. Get help from a professional, do the research and read the fine print.

If it is inevitable a student get aid for college, don’t borrow more than is needed, try to make interest payments before the loan is due, and prepare a budget before the commencement of payments. There are many resources to educate students and parents about student loans at www.studentaid.gov.

Michele Sarna is a certified financial planner™ with Beacon Pointe Advisors and can be reached at (760) 932.0930 or [email protected].

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