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Before you start taking out loans to pay for college, you need to understand how student loans work. Student loans function similar to any other debt obligation in that you are taking out a sum of money that will eventually need to be paid back. Many students forget this part. Loans are not grants or scholarships. A loan is just that: a loan. It is not free money. In fact, you will end up paying back more money than you originally borrowed due to interest charges. before we get into all of this, we will first discuss the basics.

Student Loan Basics

When you receive a student loan, the money is usually sent directly to the college where tuition costs will be deducted before the remainder is sent to the student for other expenses such as books and living costs. This will occur at the beginning of every semester until the student has graduated.

You should also know that there are two main types of loans to be found for students: federal loans and private loans. Within these categories are several more types of loans. The main difference between federal and private loans is where they come from. Federal loans come from the college or the federal government while private loans are given out out by banks or credit unions.

Federal Loans

These types of loans are given out by either the college or the federal government and are generally the best type of loan for a student. However, these loans come from a smaller pool of money and so they are reserved for those with the greatest financial need. Because of this, they are highly competitive and tougher to get. Everyone is eligible though so it doesn’t hurt to apply. There are two main types of federal loans to apply for:

Perkins loan – This is a type of loan where the money is lent by the college which the student is attending. The federal government establishes and funds a pool of money which the college draws from in order to disburse the loans. This is how student loans work. These pools of money are quite small however, which makes them more competitive and therefore reserved for those with the greatest need of assistance. The terms of these loans are often seen as being more favorable toward students because of the benefits they offer such as a nine month deferment period and low interest rates. As an added bonus, students may not even have to pay their loan back if they agree to enter into a public service field such as military or civil service for an amount of time.

Stafford loans – These are the most common types of federal loan. In contrast to Perkins loans, Stafford loans are strictly regulated by federal rules rather than financial need or credit score. This means that they are available to almost any student. Stafford loans also come with benefits for students including lower interest rates

Private Loans

Because federal loans are only meant to cover the basic necessities, they can sometimes fall short of what you really need. In these cases, you should consider a private loan. Just as the term suggests, private loans are given out by private lenders such as banks or credit unions. These loans have both negative and positive aspects. On the positive side, some lenders will offer features such as automatic debit and there is no limit to how much you can borrow. However, private loans are usually more expensive and require shorter deferment periods. Unlike federal loans, private loans are approved based on credit history so you will need to have a good credit history or find a cosigner with a high income.

A Good Investment

Student loans are easy to apply for and just a bout anybody is eligible for some kind of loan. Now that you know how student loans work, you can choose the loan that is right for you. Just be aware that loans can be expensive and it may take a long time to pay it back, so be careful not to borrow more than you need.

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