Student Loans 101

By Kristi Mexia

November 30, 2012 4 min read

Investing in higher education is expensive. Unless a Daddy Warbucks is readily available, a student loan -- either through the government or a private servicer -- is needed to fund that degree prospective students are jonesing for. There are many factors to consider before applying for a student loan, such as: Will you qualify? How much money will you receive? How do you pay it all back? And, most importantly, is all that debt worth it in the end?

Almost any type of student may qualify for a government-sponsored student loan, with -- according to the U.S. Department of Education -- more than $150 billion in grants, loans and work-study up for grabs each year. To hit up the Department of Education for some cash, click over to FAFSA, Free Application for Federal Student Aid, fill out and submit the free application online. Filling out the FAFSA application is important. It not only puts a student in the running for government funds, but it is also used by many states and universities to determine a student's eligibility for state and school aid.

How much money the government forks over depends on a variety of factors. The Federal Student Aid website breaks it down like this: A student or parents applying for government loans should be aware that the amount of aid they should expect to get is directly related to the institution's cost of attendance (COA) coupled with a student's expected family contribution (EFC). They use basic math -- subtracting a student's EFC from their determined COA -- to arrive at that need-based dollar-and-cents payout.

A student's COA is more than just tuition, though. A COA encompasses what it will cost to actually go to school. That means -- besides tuition -- room and board, transportation costs, the ever-expensive text books, a computer, a trip to Staples and any additional expenses if you have a disability or other personal needs should also be factored in.

While applying for loans may sound cumbersome, it is fairly easy to get large sums of money from the government. It is the ease with which students can come into insurmountable debt that is contributing to "over 10 percent of student debtor households (owning) more than $61,894" in 2010, reports a recent Pew Research survey on student debt.

Suddenly coming into large sums of money is great. But what most people fail to realize is that you have to pay loans back -- with interest! Depending upon a person's status as a graduate or undergraduate student and what types of loans he/she is taking out, subsidized or unsubsidized, interest rates can range from 3.4 to 7.9 percent, according to the Department of Education. Rising interest rates and racking up loads of debt by attending expensive universities has fast led to a rising American debt epidemic.

"About one out of five -- 19 percent -- of the nation's households owed student debt in 2010, more than double the share two decades earlier and a significant rise from the 15 percent that owed such debt in 2007," according to the Pew Research Center survey.

The steady rise of student debt and a poor job economy for new graduates often leaves students with high debts and low job prospects. While much of this information is disheartening, people keep attending higher education institutions and continue to take out loans, believing that a degree will be worth it.

In an "Is College Worth It?" report the Pew Research Center said that 86 percent of college grads surveyed in 2011 still believe "that college has been a good investment for them personally." But now, more than ever, higher education most be looked at more as a gamble, with high student-loan stakes, than a sure bet for a cushy job and a corner office.

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