In this article we're going to discuss the topic of student loans and what a parent needs to be careful about.
Let's face it, sometimes your kid just isn't smart enough or you're not poor enough to qualify for a scholarship or financial aid. Yet, when it comes time to pay for your kid's tuition, you just don't have the money. So what do you do?
In these cases the only recourse, unfortunately, is to apply for a student loan. Well, before you get yourself in over your head, there are things you need to know about student loans now so you're not surprised later on.
Even if you're well off, tuition rates are insane. The average yearly tuition for college is now around $25,000 a semester, and that doesn't include if the student decides to live on campus. That can escalate the cost to close to $40,000 a semester. So we're talking over $150,000 for a bachelor of arts degree. That's like buying a small home. And the truth is, next to buying a home, college tuition will be the biggest expense most families will have in their lifetime. The problem with student loans is that if they are not properly planned they can become a total disaster.
The main problem is that most students don't research the loan they are applying for before they literally sign their life away. The biggest mistake a student makes is when going to the financial aid office of a college they fill out a generic form for a student loan. Never do this just because it is available. You have no idea what kind of loan you're filing for. You need to research where the loan will be coming from and all other financial institutions to see what the various interest rates are. The school may be giving you an application for a loan that will be between 8 and 12% when you can easily get one for as little as 6%. This will save you a lot of money down the road.
The loans that traditionally have the best interest rates are the Perkins Loans. These are loans with rates that are set by the federal government and are currently at 5%. They are available through your school but usually they will not mention them unless you ask for them. This should be the first loan you apply for before going through the more traditional sources. There are loans that are also designed for certain fields of study, but again these are usually not mentioned unless you ask about them.
Never take a private loan to fund your college. Those loans accrue interest from the minute you sign that document. With loans like a Stafford loan they don't accrue interest until six months after you have graduated. The government itself pays the interest until you are out of school. Also, do not take cash advances as the interest on them is astronomical, usually over 20%.
The most important thing to know about any student loan, even one through the government is that it's a loan, not a grant. You MUST pay it back and failure to do so can land you into a lot of trouble. So make sure you have a payment plan worked out so that you don't end up paying penalties, or worse, end up in jail.