You've probably heard a lot about student loans if you or your child are heading to college in the near future: the good, the bad, and the downright wrong. If you need to borrow for college, here are 10 things you should know about student loans first.
1. They offer more flexibility than other types of loans.
WIth most loan products - mortgages, car loans, etc. - you need to make a payment every month. There are no ways to delay your payments and no ways to reduce your payments. Student loans are a bit different, depending on the loan type and lender you have. Most offer a bit of flexibility to delay payments for a period of time, often up to a year, but for some loans like the Federal Direct Subsidized and Unsubsidized Loans, potentially much longer.
You need to assess your appetite for risk when borrowing student loans. Fixed rates stay the same until the loan is paid off (but beware of fixed rate loans that have an "in school" and "after school" fixed rate, since these will have a single rate change after the student leaves school). Variable rates change as market rates change. Market rates have been hovering around historical lows for a few years, and these rates may look enticing. But first ask yourself if you will be able to afford a higher monthly payment if rates rise. Take a look at historical rates for Prime and LIBOR and you'll get an idea of just how drastically and rapidly they can change.
3. You don't have to borrow what the school recommends.
If you qualify for financial aid, you most likely will receive a Federal Direct Subsidized or Unsubsidized Loan (or both!) in your financial aid package. These loans should always be a student's first choice for borrowing since they are built in with low fixed rates and myriad protections for when students can't afford their payments. The same goes for Federal Perkins Loans.
The picture, however, gets a little murkier with Federal PLUS Loans which are for parents. These loans don't come with the same list of benefits as the federal versions for students and they have significantly higher rates and fees. Even if this loan is in your financial aid package, it doesn't obgligate you to borrow it. Shop around and see if you can find a better deal for your family.
4. Not all student loans have a deferment period.
Pay attention to whether or not a loan is deferred before you borrow. Some loans require payments while the student is in school. If you are a parent, and you have a loan in your name or have cosigned for the student, it is wise to start paying right away to avoid capitalized interest, which will increase the total amount you will have to pay over the life of the loan.
5. Cosigners are just as obligated as the primary borrower.
As a cosigner, it is your responsibility to pay the loan if the student doesn't, no matter what your personal agreement was with the student. If the student falls behind on payments, and you don't pay on his behalf, then your credit can be affected, you could be sent to a collections agency or even be sued.
6. You have to pay them back, even if you don't finish school.
Sometimes students feel that if they didn't finish school or didn't get a good education, that they shouldn't have to pay back their student loans. Student loans are just like any other debt. If you buy a car on a loan and total it in a crash one year later, you still have to repay the loan. The same goes for student loans.
7. They are not dischargeable in bankruptcy.
Except for in very rare cases, student loans are not dischargeable in bankruptcy. When you borrow, don't take the approach that if you get in over your head, you can just file for bankruptcy.