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Student Loans 101 By Bernard Pruett Student have become a common form of financial aid, giving prospective college students the opportunity to further their education. What's even better is that college student now come in a variety of shapes and forms to appeal to more college candidates that have different needs and qualifications.
The United States Government works hard to provide eligible students with an equal chance to gain access to federal student regardless of bad credit or past financial hardships. Private student are also offered to students through banks and other financial institutions based on specific criteria, such as financial need and grade point average. Student borrowers also have the option of student loan consolidation as these mature. Although there are distinct differences between federal student and private student loans, some pros and cons common to all college student are covered below.
A student loan is similar to any other type of loan in that it is money borrowed from a lender that has to be repaid in installments over a specified period of time. Like other standard loans, there is a cost associated with borrowing money. An interest expense is charged on the student loan by the lender that has to be paid in addition to the principal loan amount. Although student and conventional have various similarities, there are some features that make college exceptionally more appealing to borrowers (i.e. students and parents) compared to standard loans.
One key benefit associated with student is that interest rates are significantly lower than interest rates charged on standard loans. This helps to alleviate the financial burden on students who are typically at an age where income is limited. Other than competitive interest rates, lenders generally offer flexible student loan repayment terms that help delay the financial pressure on students, by allowing them to wait until after graduation to start repaying the loan. Both federal student and private student generally give students a 6-month grace period, meaning that students don't have to start repaying their loan until 6 months after graduation. The grace period gives students adequate time to get settled into a new job and start earning a salary that is sufficient enough to meet monthly student loan payments.
Another advantage associated with both federal student and private student is the tax savings provided to students and parents. Students and parents who pay tuition fees for higher education are subject to tax benefits that (1) decrease their income subject to tax and; (2) provide tax credits. Tax credits basically result in a decrease in the amount of tax you are required to pay by the Internal Revenue Service (IRS) at the end of your tax period. Thus, tax benefits are another feature that helps ease the monetary demands of student loans.
Although student relieve college students of financial burden in the short-term, the long-term financial burden that emerges after graduation can be extremely overwhelming for those who do not prepare themselves. The average student debt is estimated to be around $17,000 and the typical loan repayment period can last anywhere from 10 years to 30 years. These figures are no exaggeration and can be very daunting for someone just entering
the career world. Some college graduates simply do not know how to fathom the fact that they owe such a large amount of money and end up overlooking their obligation to pay off their student debts. Other college graduates with newly found jobs simply do not know how to budget their income in a way that allocates sufficient funds to meet their monthly student loan payments. The result of these scenarios, where college graduates are irresponsible about paying off their debt obligations, is a severe burn to one's credit rating.
Along with other major consequences, college graduates that have a series of missed payments and/or late payments on their student loan plans can cause severe damage to their credit score. Your credit score is an important aspect of your financial identity, especially as you get older and start earning an income sufficient enough to rent or invest in real estate and other long term assets. Having bad credit can seriously hinder you from financial endeavors in the future, such as getting approved for direct and mortgage loans. Financial responsibility is extremely beneficial for all individuals to learn and practice at a reasonably young age to prevent problems in the future.
Budgeting wisely is an important step one can take to achieve financial responsibility. As soon as you enter into the career world, you should immediately write out a budget that allocates sufficient funds to pay for all your monthly expenses, such as your rent or mortgage, car loan payment, student loan debt, food, gas, and insurance. After you have assigned money to cover your immediate monthly expenses, you should then create a savings fund and allocate approximately $50 to $200 per month to the fund. A savings fund is very useful in unexpected emergencies, such as hospital bills and car repairs, and helps ensure that money is available when needed in urgent situations. Students, student graduates, parents, and other borrowers need to understand the importance of financial responsibility and keeping up with monthly payments, in order to build a healthy credit report for the future.
