Student loans are specifically designed to help students meet the costs of a higher education. For most students loans are necessary, but like any loan, they should only be used as a last resort. Student Loans are obligations that must be repaid. They are often part of student financial aid packages, which assist with paying for their education. Many times student loans are the key to whether a young adult will be able to attend college.

The loans are generally classified into three types: Federal Student Loans for students, Federal Student Loans for parents and Private Student Loans for students or parents, and fall into three main categories, federal loans, private loans, and debt consolidation loans. If college or private school is still several years away, then a good plan is to start saving now. If the last two decades are any indication, the price of two and four-year public and private colleges are exceeding inflation and family income.

Federal Student Loans

Federal student loans are some of the most affordable loans available to students and families, with interest rates lower than most other forms of financing and deferred payments (principal and interest) until after graduation. Federal financial aid is limited and it's no secret that appropriations for aid have not kept up with rising tuition costs and inflation. Federal financial aid and federal student loans are based largely on demonstrated financial need (except for the PLUS loan), and if you fall in the category of "not poor enough for aid, and not rich enough to pay out of pocket"; federal financial aid may be no help at all. It isn't very easy to decide between federal student loans and private student loans. Federal student loans are awarded, according to the needs of the applicants and thus, this guarantees approval even if you have bad credit or no credit at all or if you don't have a suitable income for affording a private student loan. Federal loans should be the first place you look for funds after you have received scholarship or grant money. Federal loans can be used to pay for tuition, room and board, fees and other education related expenses. Federal Pell grants (not loans) are available for students whose family income is under $40,000. Federal Parent Loans for Undergraduate Students (PLUS) loans are granted to creditworthy parents of dependent, undergraduate students. Federal PLUS loans are loans made to parents, and can be used to cover up to the total cost of your education, excluding any financial aid you receive. Federal PLUS Loans are low-interest loans made to parents of dependent undergraduate students and to graduate or professional students. Federal PLUS loans are not based on financial need.

Private Student Loans

Most student loans are funded by the federal government although they can also be financed through individual institutions and private lenders. Private loans can also be used to supplement federal student loans, when federal loans, grants and other forms of financial aid are not sufficient to cover the full cost of higher education. Unlike government loans, there are fewer controls on the cost and pricing of these private loans. Under current rules, if you were to borrow directly from the government under the Stafford program right now it might cost as much as 4 percent of the amount to be borrowed, or 3 percent if you were borrowing from a private lender subsidized under the Federal Family Education Loan Program FFELP(used by about 80 percent of colleges and universities). Graduate Students can also receive school loans as Private Student Loans to help cover the total cost of college. To use private student loans as a substitution to federal aid, rather than a supplement is short-sighted on the part of the borrower. As reputable private loan sources purport, private student loans are only valuable when filling the gap between total college expenses and a borrower's awarded financial aid.

Indeed private student loans have their advantages. One of the benefits of a private student loan is that you have lots of ways of repaying it. Many financial aid experts will urge prospective students, with conviction, that private student loans are the logical alternative to federal aid in affording higher education. Furthermore, private aid is awarded not on need-based criteria like federal aid, rather on creditworthiness. You do not have to file forms with the federal government in order to apply for a private student loan. Private foundations granted more than $3 billion in scholarships to eligible students. It is best to use private student loans after you have applied for all other available aid sources recommended by your school. Most first-time students will ask a credit-worthy parent or other to co-sign the application in order to qualify for private student college loans. Because private loans are based on the credit history of the applicant, the overhead charge will vary. "Interest rates on private loans can climb to well over 12 percent.

Credit

It is good to have one national card (Visa, MasterCard, Discover) on hand to help you build a positive credit history and to provide security in emergencies. Do you whip out a credit card to pay for your books, or do you apply for a federal or private loan. With a credit card the interest rate can be as high as 21%. This is not to say that credit cards do not have a place in your college life. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit.

If you don't repay your student loans on time or according to the terms of your promissory note, you might go into default, which will affect your credit rating. Here are some consequences of default: National credit bureaus can be notified of your default, which will harm your credit rating, making it hard to buy a car or a house. The parents have signed the master promissory note to pay and, if they do not do so, it is their credit rating that suffers.

Student Loan Consolidation

A Consolidation Loan allows you to combine all the federal student loans you received to finance your college education into a single loan. Consolidation pays off your original student loans. Consolidation of student loans can be the ideal solution when one requires help to manage their debt. Consolidation allows you to lock-in the lowest possible interest rate. Consolidation offers lower monthly payments by giving borrowers up to 30 years to repay their loans. A lender can provide a new consolidation loan borrower with the lowest statutory weighted average interest rate for loans by using the lower of the weighted average of the interest rates on the loans being consolidated as of July 1 or the date the lender received the borrower's consolidation loan application. A Direct Stafford subsidized or unsubsidized loan or at least one Federal Family Education Loan (FFEL) program Stafford subsidized or unsubsidized loan will be included in the Consolidation loan. You should keep in mind that although consolidation can simplify loan repayment and lower your monthly payment, it also can significantly increase the total cost of repaying your loans. If you don't need monthly payment relief, you should compare the cost of repaying your unconsolidated loans against the cost of repaying a consolidation loan. Take the time to study your consolidation options before you submit your application. Federally funded loans are administered initially through the US Department of Education's Federal Student Aid programs, and are usually the easiest to get student loan consolidation services for. The rate on your Consolidation Loan will be fixed for the life of your loan. The interest rate on a Consolidation Loan is set according to federal law. There is private loan consolidation, and it's worth looking into--some of the banks offer interest rate discounts and co-borrower release after a few years of consecutive on-time payments.

Student Loan Repayment

Repayment is now defined as not beginning until 6 months and one day after the date the student ceases to carry at least one-half the normal full-time academic workload, as determined by the school. Repayment of Consolidation Loans begins within 60 days of the disbursement of the loan. Think about your repayment options and now might be a good time to consider student loan consolidation. Your monthly payment will depend on the size of your debt and the length of your repayment period. We can't emphasize enough the importance of making your full loan payment on time either monthly (which is usually when you'll pay) or according to your repayment schedule. Student loans are real loans just as real as car loans or mortgages.



Frank Richman: For more information about financing your higher education visit http://www.yourcollegefunding.com