What is a Student Loan?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 21 April 2020
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A student loan is a form of financial assistance which is offered to college students. There are a number of different types of loans available to students, some of which have very favorable interest rates and repayment terms. Students can use student loans to pay for tuition and housing expenses, and to handle other expenses related to education, such as purchases of computers, transportation costs, and so forth. The goal of most student lenders is to make education accessible to all people, with the lender banking on the fact that people will be able to repay the loans once they graduate with marketable skills.

When students attend a college or university, they have the option of applying for financial aid. Applying for financial aid gives the student access to a range of grants, scholarships, and loans, which are offered on need-based and merit-based terms. Typically, students will be informed that they qualify for a set amount of student loans, and they can choose to accept those loans, or to reject them.

Some student loans are administered by the government, in which case they usually have the best interest rates and repayment terms. Many have interest deferment programs, in which the interest on the student loan is paid by the government while the student is in school, and the student usually does not need to start paying on the loan until after graduation. Other student loans may be offered to parents, in which case payments will usually be required immediately, but as long as the government administers the loan, the terms will usually be very favorable.

It is also possible to obtain a student loan through a private company. Private financing does carry some disadvantages which students should be aware of. Most private loans have higher interest rates than government loans, and they may come due immediately, with no deferment of payments or interest. Private lenders also tend to be less forgiving about repayment terms, and they may not offer hardship deferments or other options to make it easier to repay the loan. Some private lenders have historically engaged in predatory lending to students, and students are strongly advised to talk to financial aid officers about their private lending options to get the opinion of someone who is experienced in the field.

Some students are reluctant to go into debt to finance their college education, and they may resolve to refuse student loans. While the desire to be prudent is certainly laudable, students should not compromise their educations to avoid going into debt. Especially when government loans can be obtained, the debt is very manageable, and it will seem minuscule a few years after graduation. Options like grants and scholarships should certainly be pursued first, but if a student loan will make the difference between being able to attend a school of choice and being forced to go to another institution, the loan should be accepted. Incidentally, the interest on a student loan is often tax-deductible, so repaying student loans will actually save money on taxes in the future!

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Student loan debt is on the increase. Both, the amount of money borrowed and the number of students borrowing money is growing. Only about one third of students put themselves through college without taking out any loans.

This trend of higher debt has also significant social implications. For example, some college graduates put on hold other activities in their life due to debt, such as getting married and having children.

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