| There's good debt and bad
debt. Student loans are good debt (to some degree
- no pun intended) because they are an investment in
your future. Yes, I did say "to some degree."
You should only borrow money if you are getting a degree
in something that you can actually, you know, MAKE MONEY
WITH! Also, if you can get just as good of an
education at a school that costs $10,000 a year, you
shouldn't borrow money to go to one that costs $40,000 a
year. As with anything, good judgment should be
used when making the decision to borrow money and get
into debt.
NOTE:
NEVER take out
a private student loan!
Only get the federal kind. Why? Because
private student loans are allowed to increase your
interest rate whenever they feel like it... and you
cannot ever get out of them by, say, declaring
bankruptcy. So, don't do those. Now, I'll go
on to talk about the good kind!
Student
loans are, basically, low interest loans that are
subsidized by the federal government. To get the
"federal subsidized" part, you have to qualify by
showing a financial need.
The maximum interest rates for
students loan are 8-9%, but are currently in the mid 3's
-- which is really low!
The two most popular types of
student loans are:
|
The Stafford Loan |
|
The PLUS Loan |
Here are the differences:
The
Stafford Loan:
- This student loan is in
the student's name.
- You don't have to make
payments until 6 months after your graduate (or drop
below "half-time" status -- taking 6 semester units
or less).
- The interest does not
start until after your graduate (or drop below
half-time). (The government basically covers
the interest for you while you're in school.)
- The set pay-off time is
usually ten years after graduation.
|
Stafford
Loan Limits (as of June 2005-2009) |
|
Dependent
(If your parents claim you on
their income taxes.) |
Independent
(If your parents don't claim
you on their income taxes.) |
|
Freshman year: |
$2625 |
Freshman year: |
$6625* |
|
Sophomore year: |
$3500 |
Sophomore year: |
$7500* |
|
Junior/Senior years: |
$5500 |
Junior/Senior years: |
$10,500* |
*
Yes, you can borrow more, but only the
"dependent" amount is federally subsidized.
You can borrow up to $18,500
for graduate school ($8500 is subsidized).
Medical students can borrow up to $38,500 ($8500 is
subsidized).
The
PLUS Loan:
- The loan is in the
parent's name.
- The interest and payments
start right away.
- The interest rate is a bit
higher than the Stafford Loan.
- The loan limits are
higher.
|
|
Here's what's the same:
For both types of student
loans, the student needs to continue to make
satisfactory progress towards his/her degree. The
interest is tax-deductible (to a certain degree).
For the PLUS loan, if your parents make a lot of money,
they may not get the deduction.
|
You can apply for student loans
through your school's financial aid office and they will
help you find a loan. You'll need to really plan
ahead for this, so start planning a year in advance.
The paperwork alone will take about a month to fill
out!
Here's
the most important thing about student loans: Yes,
you HAVE TO PAY THEM BACK! And don't think you
won't!
If you default (don't pay) on
your student loans, several really bad things will
happen to you:
-
The government
will keep your tax refund.
-
The government
will garnish your wages. No, this doesn't mean
that they will put parsley on them... It means
that they will automatically take part of your
paycheck. And, really, they won't care if they
leave you enough left to live on or not. It
will be brutal.
-
If the
government has to take you to court, you'll have to
pay for their legal fees and this will usually
increase the amount you owe by 30%.
-
It will hurt
your credit rating (FICO score).
So, don't make the
mistake of thinking you won't have to pay for your
student loans... And keep in mind how much you are
borrowing... When you get out of school and want
to think about buying a house, you'll have this debt to
deal with!
Here's a good link for this
type of thing:
http://studentaid.ed.gov
You can
search for a student loan using our Google "safe
search" option. Or you can search for a different
topic on Finance FREAK. A new window will open
with your results.
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