A Stafford Loan is a loan for students attending colleges or, in some cases, trade and business schools. Student loans are one of the primary means by which most can pay for their education and additionally offset the financial burden of attending a school on a full-time basis. A Stafford Loan can be obtained by someone attending school at least part time, but will be offered at lower amounts than those for full-time students.
There exist two basic types of Stafford Loan, subsidized and unsubsidized. Neither type requires a credit check. However, to apply for either type of Stafford Loan, one must fill out paperwork that states income. This information is computed with the price of attending a particular school, and an offer is made of the maximum amount one can obtain per academic year.
A Stafford Loan may be reduced or increased depending on other sources of financial aid. For example, a student who receives grants or scholarships will have a reduced offer on loans. Since, in most cases, grants or scholarships do not have to be repaid, reduced loan amounts are advantageous to the student, as they mean less debt obligation when the student graduates.
A subsidized Stafford Loan is need-based. Subsidized loans are guaranteed by the federal government, which pays all interest accruing on the loan while the student remains in school. Since financial aid decisions are made based on tax returns the year prior to attending school, some people do not qualify for subsidized loans. If one is going to quit work to go to school, additional paperwork can be filed to show significant change in financial status, which will change determination of need.
Therefore, those who do not initially qualify for a subsidized Stafford Loan may be able to have their status changed so that the loan is subsidized. This change is valuable because an unsubsidized Stafford Loan ends up being a much costlier loan to repay. Instead of the government paying the interest while the student is in school, the student is responsible for paying the interest.
The student can defer paying the interest until graduation, or when school attendance ends. This results in higher loan payments when repayment starts. To a new graduate, loan payments present a financial challenge. Students can end college owing between 20,000 to over 100,000 US dollars (USD). Loan payments are not always negotiable, and wages may be garnished if a student defaults on a loan.
Further, one cannot clear loans through bankruptcy, so the student is burdened with significant debt from which there is no escape. Some relief may be offered in the form of deferment of the Stafford Loan. Students can defer loans during times of great financial need, serious illness of oneself or an immediate family member, temporary disability, or a return to school with at least six units of coursework. In rare cases of total disability, the loan may be forgiven.
Deferral of a subsidized Stafford Loan will not increase the amount which must be paid back, as the government will again assume responsibility for interest accrual. On the other hand, each time an unsubsidized loan is deferred, the student will increase his or her debt and have higher loan payments when he or she begins to repay the loan.
A Stafford Loan can be obtained through a variety of lenders, and one should give consideration to the repayment policies of each lender before choosing one. Financial aid representatives may advocate for the student choosing several lenders. Students should be aware that schools receive kickbacks and incentives from various lenders, and should treat advice regarding lenders with caution.
Unless financial need requires it, students should keep borrowing to a minimum. They should give consideration to the kinds of fields they may enter upon graduation, and to what degree the salary in these fields will help them to repay loans. Amounts borrowed should be evaluated on the basis of the ability to repay the loan, particularly if one is entering a poorly compensated field. Loan repayment prices begin at 50 USD monthly. Repayment rates on larger loans are generally much higher, and may be between 200 and 300 USD per month.
Tuesday, February 5, 2008
Student loans:good or bad?
You can define good debt as borrowing for things that will appreciate in value, or will not depreciate. In other words, when you borrow money to invest in something durable and you’ll see a tangible return on that money, you’ve acquired good debt. Nearly all good debt is characterized by lower interest rates, and it includes loans to purchase property, or to start a business. Student loans are considered good debt under many circumstances because they usually have low interest rates and they represent an investment in your ability to make more money. Since a college educated person is likely to make more money than someone without a college education, most credit agencies see your student loans as good debt.
There are some that argue that any debt is bad debt since you have to pay it off. If you apply for other loans when you already have large student loans, potential creditors will still weigh your debt to income ratio to see if you can really afford to make payments on another loan. When you have several tens of thousands of dollars in student loans, even though this debt is considered “good,” it may still affect your ability to purchase other things with credit, like homes or cars.
Failure to comply with student loan payment schedules can easily wreak havoc on your credit rating. Like any debt, not paying on time or missing payments can lower your credit score and subject you to fines or fees. Additionally, although loans for students are considered good, they don’t equally benefit all. If you take out loans and don’t finish your college education, you may not have increased your earning potential. Some fields of study notoriously don’t have high paying jobs when you do finish school.
If you earn your teaching credential, for instance, you may have a difficult time managing high payments for large loans on a relatively small starting salary. It makes sense to evaluate the earning potential of the field you plan to enter, and use this information to make prudent decisions about loans. When other sources of funding are not available to you, you may also want to consider choosing colleges that cost less so that your total amount owed when you finish college is not prohibitively expensive.
One significant difference between student loans and other types of good debt is that you’re not investing in something you can return. If you take out a mortgage on a house, or you fund a business, you may be able to repay the loan by selling the house or the business. You can’t sell your college education, and barring a few circumstances like permanent and total disability, you cannot escape paying student loans.
Declaring bankruptcy will not clear most student loans, as it might with business loans or mortgages. Essentially you are stuck with this debt, which though it may be considered good, can also be very bad when you’re not making enough to repay it. Many loans do have options to defer repayment, but these are of short duration and it usually means you acquire interest while the loan is being deferred. Furthermore, if you default on any of your loans and plan to go back to college, don’t expect to be able to get more loans. You have to maintain a consistent payment schedule, repay anything you may owe in back payments, and clear up the default before you get more student loans to continue or finish a college education.
There are some that argue that any debt is bad debt since you have to pay it off. If you apply for other loans when you already have large student loans, potential creditors will still weigh your debt to income ratio to see if you can really afford to make payments on another loan. When you have several tens of thousands of dollars in student loans, even though this debt is considered “good,” it may still affect your ability to purchase other things with credit, like homes or cars.
Failure to comply with student loan payment schedules can easily wreak havoc on your credit rating. Like any debt, not paying on time or missing payments can lower your credit score and subject you to fines or fees. Additionally, although loans for students are considered good, they don’t equally benefit all. If you take out loans and don’t finish your college education, you may not have increased your earning potential. Some fields of study notoriously don’t have high paying jobs when you do finish school.
If you earn your teaching credential, for instance, you may have a difficult time managing high payments for large loans on a relatively small starting salary. It makes sense to evaluate the earning potential of the field you plan to enter, and use this information to make prudent decisions about loans. When other sources of funding are not available to you, you may also want to consider choosing colleges that cost less so that your total amount owed when you finish college is not prohibitively expensive.
One significant difference between student loans and other types of good debt is that you’re not investing in something you can return. If you take out a mortgage on a house, or you fund a business, you may be able to repay the loan by selling the house or the business. You can’t sell your college education, and barring a few circumstances like permanent and total disability, you cannot escape paying student loans.
Declaring bankruptcy will not clear most student loans, as it might with business loans or mortgages. Essentially you are stuck with this debt, which though it may be considered good, can also be very bad when you’re not making enough to repay it. Many loans do have options to defer repayment, but these are of short duration and it usually means you acquire interest while the loan is being deferred. Furthermore, if you default on any of your loans and plan to go back to college, don’t expect to be able to get more loans. You have to maintain a consistent payment schedule, repay anything you may owe in back payments, and clear up the default before you get more student loans to continue or finish a college education.
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