Part II: Loans and Credit During the College Years

This is Part II of the guide, Understanding Loans and Credit At Every Stage of Life.

If you are financing any of your college education with borrowed funds, you are not alone. Skyrocketing tuition costs, increasing cost-of-living expenses and record unemployment rates mean that millions of U.S. college students are going into debt. The average student loan balance was over $24,000 in early 2012, and nearly 40 million students were using a student loan. Choosing your student loan carefully, using credit wisely and smart budgeting may mean more than you think after graduation.

Standard Options for Student Loans

Stafford Loans are government loans at low interest rates that have a variety of repayment options. There are two ways to take a Stafford Loan. The need-based program is a subsidized loan, meaning that as long as you are enrolled at least half-time in undergraduate or graduate school the government will pay the interest that accrues on the loan before you graduate. In order to apply for the subsidized Stafford Loan you must complete the Free Application for Federal Student Aid (FAFSA).

The unsubsidized Stafford Loan is not need-based; any student may qualify. You may either pay the interest during school or defer it via capitalization. When you capitalize the interest, the total amount is added to the original loan amount when you graduate. This is a more expensive loan but may be an option if you don’t qualify based on financial need.

The Perkins Loan is designed for both undergraduate and graduate students with major financial hardship. Perkins Loan funding, while federally based, is administered through individual schools. FAFSA data is used to calculate your eligibility, but early application for admission to your school is the best way to be considered for a Perkins Loan; funds are awarded on a first-come, first-serve basis. If you qualify for a Pell Grant, which is a federal need-based grant that does not require repayment, you are given top priority for a Perkins Loan. Loans are low-interest and interest is subsidized.

The Parent Loan for Undergraduate Students (PLUS) program is another option. In a PLUS loan, parents borrow from the U.S. Dept. of Education on behalf of their dependent undergraduate or graduate-student children; graduate students may also apply for this loan. There are no restrictions on the use of these funds as long as they are used by college students. PLUS loans are subsidized, have a fixed 7.9% interest rate and are granted based on parents’ credit-worthiness (see Part I: The Basics Behind Loans and Credit Scores).

Though there is no federal requirement, some states also offer loan programs. Individual state governments may partner with lenders in your area to provide loan alternatives for in-state residential students who need college funding. States that do generally offer them under specific circumstances, such as in specific fields of study like nursing or special education. Some states also offer loans to children of municipal or state employees; for example, children of law enforcement officers or military parents may qualify. To check whether your state offers loans and whether you qualify, check your state’s Dept. of Education website.

Military students may qualify for special military student loans at certain military institutions of education. The U.S. Military Academy at West Point offers loans to its Army officers in training. Similarly, the U.S. Naval Academy and the Citadel in Charleston, SC both offer loans to its attendees. Any military student who takes a traditional federal student loan such as the ones discussed above is also eligible to have a portion of loan principal deducted in exchange for enlistment.

College students may also opt for private loans. Private lenders generally require parents to co-sign, and these loans are ineligible for deferment or forgiveness programs that federal loans allow for certain graduates. Additionally, these loans are often more costly, have no provision to defer interest and may charge pre-payment penalties. Some schools offer private loans; however, these are rare and often have high interest rates and excessive fees; carefully examine school-funded private loans before you commit.

Online college students may qualify for federal aid. However, your school must meet accreditation standards set by the U.S. Dept. of Education in order to disburse federal aid. Before you enroll in any online school, make sure they are a government-accredited institution.

Student Loan Glossary

Navigating the maze of student loan options and making an informed choice can be confusing. The following list of terms used in student loan banking may be of use:

  • Subsidized loans: Interest that accrues during school will be paid by the government until you graduate, as long as you are at least a half-time enrollee.
  • Unsubsidized loans: Accrued interest is immediately due or must be capitalized toward the principal, due at graduation.
  • Deferment: The process by which you do not pay interest on subsidized loans; the interest is deferred until graduation.
  • Forbearance: A temporary reprieve from student loan payments due to financial hardship, participation in a national service program or other unusual circumstances. Interest accrues during a forbearance period.
  • Principal: The original amount of the loan, before interest is added.
  • Grace period: A period of time after graduation before your loan becomes due. The grace period for Stafford Loans is 6 months, and Perkins Loans is 9 months.
  • Origination fee: An administrative fee that covers the cost of issuing a loan. This fee varies and should be carefully examined; a Perkins Loan has no origination fee, but private student loans’ could be 10% or higher.
  • Guarantee fees: A fee that acts as insurance against those students who default on student loans. These fees vary; federal loans usually are lowest.
  • Default: Failure to pay your student loan debt. Default carries serious consequences: inability to apply for future financial aid and negative impact on your credit rating. While there is considerable debate about the issue, you currently may not include student loans in a bankruptcy filing. In extreme cases, the government can garnish your tax returns, paychecks or even Social Security payments to recoup its cost.

Student Credit Cards

Student credit cards are often aggressively marketed to undergraduates. While there are positives to having a student credit card, some companies take advantage of impulsive students who may not fully appreciate that they are acquiring debt. If you are considering a student credit card, pay attention to the terms of the credit card company and your ability to pay the debt. A common lure for students is 0% financing when debt is transferred to a newer account, but the fine print catches many students unaware; if a payment is even one day late, the interest can default to a very high rate. Hidden transaction fees are another unscrupulous practice, as are extremely high late fees for students who may be haphazard with payments.

On the plus side, making timely monthly payments establishes a good credit history, which most college students do not have (see Part I: The Basics Behind Loans and Credit Scores). Managing a monthly bill is a good first lesson in financial responsibility, and students can find assistance with online tools such as or the iReconcile smartphone app. Additionally, parents may feel more comfortable with the availability of extra funds in cases of a true emergency. Students may consider a credit card that is tied to a savings account at a campus credit union, or parents may co-sign an account for a student. These cards function essentially the same way that a debit card does and do not affect credit.

Using a line of credit can be tempting to perennially poor students. Unsupervised or unaware students commonly max out credit cards during college without paying the bills, and the negative credit impact can take years to undo. Many cards that are marketed to students carry high interest rates and numerous hidden fees. If you wish to access a line of credit and pay it responsibly, use care when choosing your credit card. During the selection process, ask yourself questions such as:

  • What is the interest rate?
  • Is the interest rate fixed?
  • If not, when and how does it increase?
  • What is the maximum interest rate I could  pay?
  • Does the card offer usage rewards like airline miles, gas or money back at year’s end?
  • Is there an annual fee or an activation fee?
  • Is there a grace period on payment due dates, and for how long?
  • Is there an incentive offered for good grades?

Budgeting for College Students

Financial responsibility is a learned skill.  While you are in college, it may seem as though a lifestyle of bills and responsibility is miles away. However, there are many ways to economize and learn to handle your money well. Some tips for college students who want to maximize their money include:

  • Understand your cell phone plan and stay within its limitations
  • Investigate free activities on campus
  • Use your prepaid meal plan and save your cash for other expenses
  • If you purchase food, plan ahead and use coupons to buy inexpensive, fresh options that will help you stay healthy
  • Invest in a coffeemaker
  • Buy or rent used books whenever possible
  • Set a realistic monthly budget for “play money” and stick to it
  • If you have a credit card, save it for emergencies and make payments on time
  • Balance your checkbook to avoid surprise bank fees
  • Consider prepaying accrued interest on student debt
  • If you are in an urban school, use public transit unless it is a safety issue
  • Pool funds with your roommates for household items and shop at warehouse stores
  • Carpool to class to save gas and parking fees
  • Rent movies instead of going to a theater

Successfully graduating from college without staggering debt is not easy, but it is not impossible either. Pennies add up more quickly than you may think, so economize wherever and whenever possible. Not only are you reducing your financial debt load as a student, but you are establishing good money management habits that will last you a lifetime.

Continue to Part III: Budgeting and Taking Out Loans as a Young Adult.
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