Borrowing Basics

Borrowing Basics

How to choose the right loans to pay for a college education.

In many cases, the amount of money you receive in scholarships, grants and other college financial aid will not cover the cost of your college degree. Fortunately, there are a large number of college loans available to help cover tuition and other college costs.

However, unlike scholarships and grants, college loans need to be repaid after you complete your education. Being smart about how much money you borrow and the terms under which you borrow that money can save you big bucks in the long run.

Loans will vary in their interest rates, repayment plans and loan limits, so the more you know, the easier time you’ll have finding the right one for you. Compare student loans to find out the best interest and repayment terms that fit your borrowing needs. Considering that it takes students 10 years, on average, to repay college loans, you’ll want to be sure you can live with your loan for as long as you have to.

What Kinds of College Loans Are There?

There are four primary types of college loans: need-based, non-need-based, subsidized and unsubsidized. Here’s how they differ:

Need-based vs. non-need-based:

Need-based loans are awarded to students without the necessary college money to pay for school. These loans often have lower interest rates than other loans and more generous repayment programs. Non-need-based loans are awarded based on other factors, like academic merit or special skills and achievements.

Subsidized vs. unsubsidized:

For subsidized loans, the federal government pays any interest that accrues while you’re enrolled in school at least half-time. For unsubsidized loans, you pay any accrued interest starting when the loan is issued.

Definitions for Common Terms in College Loans

Familiarize yourself with these terms you’re likely to encounter when you research college loans.

Repayment Terms

Deferment: Postponing your loan payment. You can do this if you’re enrolled in a college or university at least half-time. The government will pay any interest on subsidized loans, but you have to pay interest on unsubsidized loans.
Forbearance: If you’re experiencing a financial hardship, you could be allowed a temporary break from paying back your loans.
Grace period: This is the amount of time you have before you have to start paying back your loan. In many cases, this grace period will begin when you graduate from your college program or start attending school less than half-time.
Exit counseling: Before you leave college, you’ll receive counseling that clarifies the terms and conditions of the loan, as well as your rights and responsibilities.
Consolidation: The act of combining two or more federal loans into one loan, so you only have one payment to make each month.


Origination fees: Some loans include these fees, which cover the costs of administrating the student loans. The amounts of these fees vary depending on the type of loan. Some loans, like the Federal Perkins Loans, don’t have any fees, while most private student college loans do.
Guarantee fees: Also known as default fees, this is an amount of money paid to the state agency that approves the loan. This fee is paid to the agency to insure against default and varies depending on the type of loan; federal loans have the lowest guarantee fees, while private loans tend to have the highest.
Default: If you don’t pay back your loan on time or don’t meet other loan conditions, your loan is considered in default. Once this occurs, you won’t be able to receive additional college financial aid until you pay back the money that’s owed. Your credit rating can be affected, and your wages could be garnished to pay back your lenders.

Borrowing Tips & Tactics

  • Create a budget of your current expenses to see if there are areas you can cut down on. This could let you borrow less for school. The less college money you borrow, the less you’ll have to pay back later.
  • Transferring schools? Make sure your loan transfers with you. Contact the financial aid offices of both schools to find out if there are any issues with transferring your loan between the two schools.
  • You’ll find out how much federal college aid you qualify for when you complete the Free Application for Federal Student Aid (FAFSA) form. In addition to your federal college loans, the FAFSA will let you know which grants and other gift aid you qualify for.

People Who Read This Article Also Read:

Borrowing Tips
How to Keep Debt Low
Different Types of College Loans
Managing Your Loan Information
Subsidized Loans vs. Unsubsidized Loans
Paying for College: Federal Financial Aid vs. Private Loans

See All Guide to Student Loans and Borrowing Articles


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