Ask the Experts: Finding the Right Student Loan

The process of choosing a student loan is confusing. For most, it’s an entirely new experience full of unfamiliar terms and choices that will impact your long-term financial future. You, like most students navigating this process, probably have a lot of questions. We’re here to help!

Today we have seven questions compiled by the student bloggers at the SkippingBreakfast.com College Readiness Blog, along with answers from our resident financial aid experts. Please feel free to discuss or ask any questions of your own in the comments and we will answer them for you. On to the questions…

• Q: What’s the difference between a subsidized and an unsubsidized Stafford loan?
• A: There are two types of Stafford Loans available.  Subsidized Stafford Loans, where the Department of Education pays off the interest accrued during school, grace and deferment periods,  are available to borrowers who demonstrate financial need as determined by your FAFSA. Everyone is eligible for Unsubsidized Stafford Loans, where the borrower is responsible for the interest during the life of the loan.
  Subsidized Stafford Loans currently have a much lower interest rate than the Unsubsidized version (4.5% Fixed for Subsidized, 6.8% Fixed for Unsubsidized for the 2010-11 school year), which can save you thousands of dollars when combined with the government-subsidized interest payments.  However, there are limits to the amount of Subsidized loans you can take, meaning you might still need an Unsubsidized Stafford Loan as well. For more information on Stafford Loans, visit the Department of Education’s website.

• Q: What’s the biggest loan I should get?
• A: When taking out student loans, you should never get more than the Cost of Attendance at the school you attend. However, you will most likely be able to take out far less than that, as you should always maximize your available grants, scholarships, work-study and other Federal Student Aid before considering a private student loan. Always make sure to consult with your school’s financial aid office before taking out a loan for college.

• Q: I don’t really understand what the interest rates mean. Can you explain?
• A: The interest rate on a loan is the annual percentage of the loan balance that is charged by the bank as interest. Variable interest rates change based on an index such as the PRIME Lending Rate or LIBOR index. When the rate of the index updates, the interest rate of the loan will adjust accordingly. Loan rates vary and may change monthly, quarterly or annually. Fixed interest rates remain constant over the life of the loan, and thus make it easier to project the total amount you will end up repaying for the loan.

• Q: What will the monthly payments be when I have to pay back my loans?
• A: Your monthly payments depend on many factors, including the total amount borrowed, length of the repayment term, interest rate of the loan and the repayment option selected. To help you out, the Student Loan Marketplace provides an estimated monthly payment for each of your loan options.

• Q: Who’s responsible for paying back my loans? Me or my parents?
• A: If you are taking out a Stafford, GradPLUS or Private Student Loan, you are responsible for paying back your loan. In the case of a PLUS Loan, the parent who takes out the loan is legally responsible for it. If borrow a Private Student Loan with a co-signer, both you and your co-signer take on legal responsibility for its repayment.

• Q: How long can I put off paying my loans?
• A: There are various repayment options that you can choose from when selecting a loan. Loans that require immediate repayment must be paid back as soon as they are disbursed. Interest only loans require you to make payments to cover the interest that accrues while you are in school but do not require you to pay down the principle amount until you graduate. Loans with the full deferment option are not required to be repaid until after you graduate college. Full deferment loans often have an additional post-graduation grace period before you must begin to repay them. However, keep in mind that interest still accrues during the deferment and grace periods, so the total cost of these loans ends up being higher than that of a loan that you begin repaying immediately.

• Q: If I take a leave of absence, do I still have to pay back my loans?
• A: Yes, you are still responsible for repaying your loans if you take a leave of absence from school. You should speak directly with your lender for details about deferments.

If you have questions about student loans or the financial aid process for our next edition of “Ask the Experts”, please leave them in the comments or contact us on Twitter or Facebook.

The questions were provided by the student bloggers at Skipping Breakfast, a college readiness blog written primarily by students for students. Students will find stories, quizzes, tips and activities to help them get organized, set and reach goals, develop skills, find a dream career, and get into and pay for college when the time comes. If you’re a student, don’t wait until junior year of high school to prepare for college. Visit Skipping Breakfast for help getting started today.