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Student Loans 101

Written By:
July 26, 2010 at 11:46 PM
This tutorial will answer the following questions:
  • What are student loans?
  • What are the advantages of student loans?
  • What are the disadvantages of student loans?

What Are Student Loans?

Student loans are increasingly becoming a common type of financial aid, offering prospective college students the chance to advance their education. The good news is that student loans come in various forms and shapes to suit more college students with varying qualifications and needs.

Eligible students have the opportunity of accessing federal student loans in spite of past financial hardships or bad credit. Students can also access private student loans through various financial institutions based on particular criteria, such as grade point average and financial need. Student borrowers can also opt for student loan consolidation as their loans mature.

A student loan, just like any other kind of loan, is money borrowed from a lender which must be repaid installments over a specific period of time. Like other conventional loans, there is a cost connected to borrowing money. Lenders charge an interest expense on the student loan, which must be paid together with the principal loan amount. Though traditional loans and student loans share several similarities, there are some elements that make college loans more preferable to parents and students as compared to standard loans.

Advantages Of Student Loans

One main benefit of student loans is that their interest rates are considerably lower than the interest rates on standard loans. This helps reduce the financial burden on students who usually have limited income. Besides competitive interest rates, lenders usually offer flexible loan repayment terms. This helps in delaying the financial pressure by allowing students to wait till after graduation to begin repaying the loan. Both private student loans and federal student loans usually give students a grace period of 6 months, meaning that loan repayment does not have to start until 6 months after graduation. This grace period offers students sufficient time to settle in new jobs and begin earning a salary that is adequate to meet student loan payments each month.

Another benefit associate with both private student loans and federal student loans is the tax savings offered to parents and students. Parents and students who pay tuition fees for college education can enjoy tax benefits that reduce their income subject to taxation and provide tax credits. Basically, tax credits lead to the reduction of in the amount of tax you are expected to pay at the of your taxation period. Therefore, tax benefit is another feature that helps reduce the financial pressure of student loans.

Disadvantages Of Student Loans

Though student loans relieve students of financial burdens in the short term, the long term financial burden that comes after graduation can be very overwhelming for individuals who have not prepared themselves. The typical duration of loan repayment can be anything from 10 years to 25 years. These figures can be very intimidating for someone just getting started in the career world. Some graduates just end up ignoring their responsibility to pay off their debts. Other graduates with new jobs have no idea how to budget their income such that sufficient funds are allocated to meet monthly student loan repayments.

Besides other serious consequences, college graduates having a series of late payments or missed payments on their student loans can cause serious damage to their credit scores. Your credit score is a vital element of your financial identity, more so as you grow older and begin earning income sufficient for investing in long term assets such as real estate. Having bad credit could seriously interfere with your financial plans in the future, such as getting approval for mortgage loans and direct loans. It is important that college graduates learn and practice financial responsibility at a young age to avoid problems in the future.





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