We all know that college is expensive. And running the numbers makes it all the more stress-inducing. According to the College Board, the price tag for tuition and fees at a public, four-year college for out-of-state students was nearly $25,000 in the 2016 to 2017 school year. That’s a cool $100,000 spent over a four-year college career (and let’s not think about what that cost could be in a decade or more).

Fortunately, your future co-eds may be able to turn to student loans to help foot the bill. Before they start the application process, however, it’s important they know everything about taking on student loans so they don’t leave school clueless about managing their debt.

Share this student loans 101 to help them get smart about borrowing before setting foot on campus.

  1. PUBLIC LOANS

    Student loans can be either public or private. Public loans are also called federal student loans, because you’re borrowing from the federal government, and the interest rates on them are set by Congress. For loans disbursed on or after July 1, 2017, rates range from 4.45 percent to 7 percent, depending on what type of loan you’re applying for, and whether you’re an undergraduate or graduate student, or a parent borrowing to help out your child.

    Federal student loans can also come in two varieties: subsidized and unsubsidized. For a subsidized loan, borrowers don’t pay interest while they’re in school, during a six-month grace period after leaving school or if the loan is in deferment (meaning they’ve been able to temporarily postpone loan payments). That’s because the interest during those times is being footed by the government. Only undergrads are eligible to receive subsidized loans, and the amount they get is determined by financial need.

    For an unsubsidized loan, which both undergrads and graduate students can get, the borrower does not get any help with the interest. This means the borrower must pay it, but has options for how to pay. They can pay for the interest while in school, or choose to let it accrue while hitting the books and then let it capitalize — that is, get added to the loan principal. (Choosing the latter will ultimately increase the amount they’ll end up owing.) The borrower does not have to demonstrate financial need to be eligible for an unsubsidized loan.

    To apply for federal loans, students must fill out the Free Application for Federal Student Aid (FAFSA), which helps determine how much they are eligible to receive. This information usually appears in the student’s college financial aid package.

  2. PRIVATE LOANS

    Students can apply for private student loans much the way they apply for any other type of loan: Fill out an application with a private lender, who will determine how much to offer them and at what interest rate based on their creditworthiness (i.e., how likely the lender believes the students will be to pay the loan back). A private student loan lender will determine this based on a borrower’s credit score and the information in his credit report. If the borrower doesn’t have much of a credit history, then the lender may require a co-signer.

    An interest rate on a private student loan could be fixed or variable, meaning the rate may change over the life of the loan, and borrowers may have the option to start repaying the loan while in school or after they leave.

    Generally speaking, public student loans are preferable to private student loans because the federal government offers more flexibility when it comes to borrowing and repayment. Also, interest rates for private student loans tend to be higher than for public ones. But private loans can be a good secondary option if a student doesn’t receive enough financial aid to cover college costs.

  3. They can pay interest while in school, or choose to let it capitalize — that is, get added to the loan principal.
  4. PAYING BACK STUDENT LOANS

    When it comes to paying back student loans, the federal government provides more flexibility, as well as the possibility of public student loan forgiveness, which relieves some of a borrower’s balances if he or she takes a qualifying public-service job.

    Some private lenders may offer public loan-type features, like the ability to reduce or halt payments because of financial hardship, but generally a borrower will have more repayment options with federal loans — a help for someone who ends up in a tough financial situation. These options can include graduated repayment, which starts with a lower payment earlier in the payment timeline, which then gradually gets larger; extended repayment, which extends the timeline from the typical 10-year repayment period; and income-based repayment plans, which set a monthly payment amount based on how much the borrower makes. Keep in mind, though, that some of these plans could increase the total amount a borrower ultimately owes, because you’re still accruing interest on your overall balance — even if your actual payment due has been lowered.

    Federal loan borrowers may also be eligible for deferment or forbearance — temporarily suspending payments — for a period of time if they meet certain eligibility requirements. The primary difference between the two is whether interest accrues during the time the payments are halted. In deferment, subsidized loans don’t accrue interest, but unsubsidized loans do. In forbearance, both subsidized and unsubsidized loans accrue interest.

    If in the future your college grad thinks he can lower the interest rate on his federal loans by refinancing them (i.e., selling them to a private lender), he’ll just have to remember that privatizing those loans will mean losing the protections and flexibility mentioned above. Another option: If a borrower has multiple federal loans, he can consolidate them into one to make one monthly payment. But that won’t necessarily lower his interest rate, as the new interest rate will be a weighted average of the interest rates on all the loans. Plus, consolidating takes away the ability to get strategic about paying off debt more aggressively by prioritizing those loans with the highest interest rates and balances.

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