Student Loans 101 (Financing Your Education 2/4)
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Student Loans 101 (Financing Your Education 2/4)

Meet Zoe. Zoe is a high school senior that has been
accepted into five colleges. She’s very excited. However, she’s also a little bit confused. She sees several types of student loans in
the award letters, and doesn’t really know what to do with them. What should she do? Well, beyond watching our other introductory
loan videos, “Loans 101” and “Loans: Mistakes and Best Practices”, Zoe should
first read carefully through her award letter. This document, which details the aid she was
awarded, also tells her exactly what she needs to do to get her loan, including how to sign
the loan contract, called the Master Promissory Note, and whether or not she needs to do entrance
counseling, which is a brief, free online course in student loan management. Then assuming, Zoe has done all that, her
next step is actually quite simple: understand how federal student loans work. The most common ones are called Direct Loans,
also known as Stafford loans. These have a fixed interest rate of 4.29%
as of 2016 and a loan amount dependent on your need. They also have a rather unusual wrinkle: they
can either be subsidized or unsubsidized. Subsidized loans don’t start accruing interest
or require their holders to pay back principal until 6 months after graduation. This can make them financially a great deal,
though accordingly they’re reserved for students who demonstrate greater financial
need. In contrast to this, unsubsidized Stafford
loans are available to all students, with principal payments that are also deferred
until six months after you graduate. However, unlike subsidized Stafford loans,
interest continues to accrue on these loans while the holder is in college. Thus, if you can, we highly recommend you
pay off this accrued interest before it’s added to the balance six months post graduation. After all, the last thing you want to do is
pay interest on your interest. So that’s Stafford loans. However, they’re two other major types of
federal student loans: Perkins Loans and Direct Plus Loans. Perkins loans have extremely favorable terms:
a fixed 5% APR and no interest and principal charged until nine months after graduation. While this is certainly great, keep in mind
to qualify for a Perkins loan you’ll need to demonstrate exceptional financial need
on your FAFSA. Finally, we have Direct PLUS loans, which
are either given to graduate students or to the parents of undergraduates. Direct PLUS loans are designed to cover the
difference between the cost of attendance and the financial aid received. Like Stafford Loans, they have deferred payments
until six months after graduation, unless you’re a parent, in which case you’ll
have to request it, with interest that accrues throughout college in either case. Finally, if for whatever reason federal student
loans aren’t enough to cover Zoe’s tuition costs, Zoe can also apply for private student
loans, most likely with her parents as cosigners. These loans can be a good financing solution,
and our recommended provider makes it easy to get multiple private student loan offers
with one simple application. However, be warned, private student loans
aren’t nearly as favorable as federal ones. Their interest rates are frequently higher,
plus they require a credit score of at least 650 and lack many other benefits, such as
income based repayment plans. Hopefully you and Zoe now have a better understanding
of student loans. Be sure to watch our next video to learn more
about repaying your federal student loans, and be sure to check out our website, where
you can find outside scholarships, private student loans, and more educational content.

About James Carlton

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5 thoughts on “Student Loans 101 (Financing Your Education 2/4)

  1. This is a way for the Democratic Party to corrupt our higher educational system. Offer loans, with your promise to pay it back after graduation. Now, billions of dollars now exist in our higher educational system, which drives the cost up. Then you enslave those who must pay it back because no bankruptcy law allows you to escape from your commitment. Then the Democrats offer a free pass, forgive your commitment if you vote for us. Elizabeth Warren, Berny Sanders represent this philosophy. Now the real truth is the government only generates money by taxation, so who pays? We pay. Who gets the credit for forgiving the debt, the Democrats.

  2. Do a calculation on how much money you would have if you choose not to go to college and work for those four years instead and save every dollar that you earn in those four years and invest it. How much money will you have in 4 years at the time that your friends are graduating college? Now continue the calculation with you adding to that investment for the next 20 years while your college graduate friends are making that same payment to pay off their student loans. At the end of the entire 24 years you will see that the 42 year old college graduate just finished paying off their debt and is now ready to start investing starting with $0 accumulated so far in their life. Meanwhile the 42 year old high school graduate is a very wealthy person.

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