What Is an Education Loan?
An education loan is a sum of money borrowed to finance
post-secondary education or higher education-related expenses. Education loans
are intended to cover the cost of tuition, books and supplies, and living
expenses while the borrower is in the process of pursuing a degree. Payments
are often deferred while students are in college and, depending on the lender,
sometimes they are deferred for an additional six-month period after earning a
degree. This period is sometimes referred to as a "grace period."
An education loan is a sum of money borrowed to finance
post-secondary education or higher education-related expenses.
Education loans are intended to cover the cost of tuition,
books and supplies, and living expenses while the borrower is in the process of
pursuing a degree.
Payments are often deferred while students are in college
and, depending on the lender, sometimes they are deferred for an additional
six-month period after earning a degree.
Although there are a variety of education loans, they can be
broken down generally into two basic types: federal loans sponsored by the
federal government and private loans.
How an Education Loan Works
Education loans are issued for the purpose of attending an
accredited college or a university and pursuing an academic degree. Education
loans can be obtained from the government or through private-sector lending
sources. Federal loans often offer lower interest rates, and some also offer
subsidized interest. Private-sector loans generally follow more of a
traditional lending process for application, with rates that are typically
higher than federal government loans.
Types of Education Loans
Although there are a variety of education loans, they can be
broken down generally into two basic types: federal loans sponsored by the
federal government and private loans.
Federal Student Loans
Most borrowers first seek federal government financing if
they need to borrow funds for education expenses. The first step in seeking
education loans through the federal government is to complete a free
application for federal student aid (FAFSA). Depending on the applicant's
status, particularly in regard to their parental dependency, different
information may be required to complete the application. A credit check is not
generally required as part of the application process. The amount of principal
on the loan or loans is primarily based on the cost of attendance at the school
the student is planning on attending. Once a FAFSA form is completed, the
schools listed on the FAFSA application work to identify the financial aid
package that the student is eligible for.
Various types of federal student loans exist, including
direct subsidized, direct unsubsidized, and direct consolidation loans. If
offered and accepted, funds will be issued by the federal government to the
specified university to cover the student's academic costs. If there are
remaining funds available, they will be disbursed to the student. A student may
use these funds to cover other expenses that they incur while pursuing a
degree. If a student qualifies for subsidized loans, the borrower?s interest
will be covered while they are in school. If a student qualifies for
unsubsidized loans, the interest on their loans will be deferred as long as
they are enrolled in classes and remain in good academic standing.
Private Student Loans
In some cases, the student loan package that a student is
issued through the federal government may suggest that the borrower applies for
additional funds through private lenders. Private student loans also include
state-affiliated lending nonprofits and institutional loans provided by the
schools. These types of loans will generally follow a more standard application
process (like what is typical of any private-sector loan). Applications for
private student loans typically require a credit check.
Borrowers can apply directly to individual private-sector
lenders for funds. Similar to federal funds, the approved amount will be
influenced by the school a borrower is attending. If approved, funds for
educational expenses will first be disbursed to the school to cover any pending
bills; the remaining amount is then sent directly to the borrower.
Special Considerations
Accumulated debt from college can be an overwhelming burden
after graduation.
If a student has taken out numerous education loans,
consolidating them can be a good option for more easily managing the debt load.
Multiple federal education loans can be combined into a single direct
consolidation loan. Also, many private lenders now allow borrowers to combine
both their federal and private loans into one loan. It's important to note that
in this scenario, the new loan will be a private one because it will be issued
by a private lender. Because the loan will be considered a private loan, the
debt will no longer be eligible for certain federal programs for loan
forgiveness and repayment. There is no option for borrowers to combine private
and public loans into a new public loan.
A number of employers are also beginning to integrate
consolidation services and student loan payment benefits into their employee
benefit programs as a way of helping to increase the support available for
managing student loan debt after college.
Students and their families should consider all of their
options before signing up for higher education loans that could become a
crushing burden in the future. Some alternatives to?or ways to reduce the size
of?loans include working part-time, accepting work-study offers, attending a
less expensive school, finding a job that offers tuition reimbursement as a
benefit, and applying for scholarships that help to cover the cost of tuition
and room and board. When the student has graduated, it also helps to search for
a job that offers help with student debt as a benefit.
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