There was an interesting analysis published on student loans entitled “Drowning in Debt: The Emerging Student Loan Crisis” and written by Education Sector, a think tank that focuses on education issues.  The July 9 piece brought to light the huge increase in students receiving financial aid and student loans.  More specifically it stated that students enrolled in private for-profit institutions incur more student loan debt than those enrolled in other institutions.

However, this may be connected to the fact that more students than ever before are using private student loans to fund their education, especially those students in private for-profit colleges.  Private student loans (unlike their federal counterparts) have little regulation and can have interest rates as high as 19 percent. Also, if the student goes back to school or loses their job, it can be much more difficult to delay payments.  This is why it is very important to make sure that private student loans are a last resort when paying for your education. You should make sure that you have exhausted all other financial aid options like grants, scholarships, and federal student loans before you apply for a private loan.

Federal Loans

Federal loans offer a low-cost loan alternative with favorable repayment options. Both Federal Stafford Loans and Federal Perkins Loans are available to undergraduate and graduate students. Federal Stafford loans are available in subsidized and unsubsidized funds.  Below are explanations of the different types of federal loans.

• Federal Perkins Loans: This loan is another low-interest loan available to undergraduate or graduate students. It is paid out through government funds with a share contributed by the school. Your school will determine your eligibility for and the amount of your Federal Perkins Loan and payment is made back to the school.
• Subsidized Stafford Loans: These loans are given to students with financial need.  They are subsidized by the U.S. Department of Education, which means they pay the interest while you’re in school, for the first six months after you leave school, and during periods of deferment (when you are eligible to delay payments for qualifying reasons).
• Unsubsidized Stafford Loans: Eligibility for this type of loan is not based on financial need and you are responsible for paying interest on the loan from the time the loan is disbursed until it’s paid in full. You can pay the interest as you go along. Or, you can allow the interest to accrue (accumulate)—for example, while you’re in school—and have the interest added to the principal amount of your loan later. This means the interest will be “capitalized.” Keep in mind that if interest accumulates, the total amount you repay will be higher than if you paid the interest all along.

In order to receive federal loans, you must complete a Free Application for Federal Student Aid (FAFSA). Your school’s Financial Aid Office will then determine your eligibility for this program and help you with the process for obtaining funds.

Student loans are a great resource, but it is important to remember that you will eventually have to pay it back.  Do your research and make sure that you take advantage of financial aid that you do not have to pay back first.  Apply for federal and state grants, and research and apply for lots of scholarship.  Then if those don’t cover the costs of your school, take out federal student loans.  Private loans should only be taken out if absolutely necessary, this way you can keep yourself from “drowning in debt.”