While there are many ways to finance a college education, more than half of students do graduate with at least some debt. Since federal loans are the most common, it can be important to understand how they work before you sign on that dotted line.
As with any other type of loan, you will be expected to pay back the amount borrowed plus interest. But unlike other loans, the federal government offers certain perks that can help students manage their loan debts. For example…
If you take out a subsidized loan, this means the federal government will pay the interest while you’re in school at least half time. That way, you don’t come out of school owing more than you borrowed (although once you graduate, interest will indeed begin to accrue after six months). If you apply for and are granted a deferment due to economic hardship, the government pays the interest during those times as well. Subsidized loans are available to certain students who demonstrate financial need, as determined by their annual FAFSA, but often do not cover the entire cost of tuition.
Interest on all student loans is determined by the federal government, and capped so that rates can climb above certain predetermined levels. Of course, many people still feel that interest rates on federal student loans is too high, and some politicians have introduced the idea of reducing or eliminating student loan interest. We will see how that plays out in the future.
On the other hand, it is important to remember that not all federal student loans are subsidized. Unsubsidized loans begin to accrue interest immediately, while you are still in school. The balances of these loans begin to grow when you sign for them.
It can be tempting to take all of the loan money you are offered; after all, college tuition isn’t cheap, and you probably have other expenses as well. The average student loan debt is currently over $35,000. But keep in mind that many former students spend years repaying their loans, and that interest does add up over time. When it is possible to fund college some other way, it can be wise to avoid loans as much as possible.