Understanding Student Loans

If you’re trying to figure out how to pay for college, you’re not alone. College is a big deal for students and parents, but it’s also expensive! The vast majority of students will need some sort of financial aid. Many will choose to take out students loans.

Before borrowing money, though, it’s important to realize that not all student loans are not created equal. Here we’ll explore how student loans work so you can make the best decision for your unique situation.

Types of student loans

There are two main types of student loans: federal and private.

Federal loans are usually the better choice. They offer lower interest rates and don’t need to be repaid until after graduation. In fact, nearly 70% of student aid comes from federal sources. Federal loans are broken down further into two categories:

• Subsidized loans: need-based loan where the interest is paid by the government
• Unsubsidized loans: loans that aren’t based on financial need and interest is paid by the student

Students are more likely to receive federal student loans if they can demonstrate that they need financial assistance to afford the costs of college. There are also limits to how much a student can borrow based on the family’s financial situation.

Private loans come from banks or other lenders. They often have higher interest rates and may require students to start repaying them while still in school. That can make things a bit tougher financially.

Still, private loans can help cover the gap if federal loans and other aid don’t go far enough. They also usually have higher borrowing limits, which can be useful for families facing bigger college bills.

Parent loans

Parents also have borrowing options when it comes to covering college costs.

One popular federal option is the Parent PLUS Loan, which lets parents borrow up to the full cost of attendance, minus any other aid the student receives. For example, if tuition and expenses total $25,000 and the student receives $5,000 in aid, parents could borrow up to $20,000.

Private lenders also offer loans for parents, though these usually come with higher interest rates and fewer flexible repayment options.

Paying it back

It’s easy for students to focus on the present and not think about what happens after graduation. But student loans need to be repaid — and that can be a serious financial commitment.

That’s why it’s important to borrow only what’s truly needed. It’s also a wise to make sure the student’s course of study will help them earn enough to pay off their loans in the future.

With that said, student loans aren’t the only way to pay for college. To reduce overall expenses, parents and students should consider options like:

• starting at a community college
• choosing more affordable in-state schools
• part-time employment
• applying for scholarships
• attending online
• taking a gap year to make money

The bottom line

Student loans can be a smart way to invest in a college education — as long as families do their homework. By learning about your options, planning ahead and borrowing wisely, you can help set your student up for success without taking on more debt than necessary.

Horizon Credit Union scholarships

Did you know that Horizon awards scholarships to qualifying students every year? It’s another way we invest in our community. For more information and to apply, visit our Scholarship Opportunities page.