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1. How do Student loans work
What they will never let you
know when you take out a
Student loan!
So you decided to go to college or perhaps you have graduated from college and
are now looking for a more advanced degree, such as an MBA? The most
pertinent question that needs to be answered is, how are you going to afford it?
For this reason it is pertinent for you to have a firm understanding of “how do
student loans work?”
Why understand the mechanics of student loans? Simple, for this is the most
likely way you, your friends, and most people pay for higher education. Oh I
know, most Financial Aid pundits tell you to research grants and scholarships aka
free money. You should, and they are ideal for funding your education.

2. The fact is, the majority of people don’t research grants and scholarships, due to
time, inaccessibility and truthfully, ignorance of qualifications. Also, the constant
commercials providing rosy pictures of simplicity, of getting education and
websites providing basic information to the ultra-positive side on “how do student
loans work?” However, the devil is in the details, the behind the scenes, and that
is my purpose in creating this article.
So let’s dive right in.
If you are not aware, student loans come in several different types. The variety is
not important, even though we will discuss them. The importance is
understanding that currently there is no way you can avoid not paying them!
This point cannot be stressed enough in discussing “how do student loans work?”
Student loans are described as two categories: financial need and other (credit
score based). However, this is a miss truth. Not as far as a lie, but let’s just say,
not giving all the information. Let me explain, college institutions employ sales
reps (Student Aid Counselors, or their equivalent Student Counselors), to push
education at any cost. The sales reps are incentivized to find you a loan or better
yet, get you to take classes regardless of income or credit. Now, in all fairness
they are beginning to crack down on some of these institutions who push this
practice. But by far, the practice of “ass in a seat” policy is alive and well. For
those who are not familiar with the term, it is used by used car sales to describe
pushing sales regardless of affordability, or the ability to pay over the long run.
Next up, let’s look at the two main categories for our discussion of “how do
student loans work?” Federal and Private. For simplicity, I will break the
categories into separate sections of the article.
Federal Student Loans
Student loans issued by the federal government have been thought as the
preferred loans, the loans of choice. Well, at least compared to taking out a
private loans. This possibly may have been true in some distance pass. This is not
the case now. Students are informed falsely that the loans offered by the federal
government are low and have fixed interest rates. What they don’t say is, the
average federal student loans range in the 6% and 7% range. They also do not tell
you that are a number of private lenders offering interest rates between 1% and
5% for consolidation of student loans. This does not even point to the fact that

3. federal student loan are even higher than mortgage rates, or even car loans,
which you could get from 2% to 5% (based on credit and other factors). The point
here is, people are induced to believe that federal loans are cheaper, so they
never question how much the interest rates are. Now, in all fairness, there is one
caveat for federal student loans that trumps private loans, they do present better
options if you find yourself in the position you cannot afford to pay them.
Let’s look at the availability of the real federal government loan, supposedly
created to address the financial need. This is none other than the Perkins Loan.
The Perkins loan is truly the gold standard in the realm of student loans, and
really that is not saying much. However, let me stay on the positive side and state
the Perkins Loan is to address need. So, sorry you may be denied even if you
present the need, simply for the fact that your adjusted income for your
household is too high. This unfortunate occurrence happens to often to count.
Also the U.S government places caps on the amounts borrowed. In 2009 the limits
for the Stafford loan began for $5,500 for your first year, and by your senior year
it was capped at $7,500, with a total limit of $31,000. Do you know the average
in-state public school tuition was during that time? No need to guess, I will tell
you, $28,000. Now this is the average, but there are many in-state public schools
who exceed the average.
Primarily there are two different ways you can get student loans from the federal
government. They are from the Department of Education aka DIRECT LOAN or
through a private lender, that’s a member of the Federal Family Education Loan
(FFEL) program. What I thought, federal loans are not supposed to be private!!
More on that in another article. Supposedly both of these loans are supposed to
have the same interest rates, criteria on eligibility, and maximum amounts you
can borrow are the same.
Both of these methods, of your disbursement are designed to go to your school.
Any remaining difference (which there always is), will be deducted from your
student loan. And, whatever is left over will be given to you in a check or direct
deposit into your bank account. In this lies a huge problem, where individuals
treat this as free money. Free money to be spent on anything and everything. This
is a serious topic to be explored at another time. Very rarely do students chose
the option of allowing the college institution to hold the money. They simply
request more loans, instead of applying excess to go towards the following
semester or school year.

4. Private Loans
Private loans, or should I say alternative loans, since many of the private entities
work in a quasi-government, private relationships provide funding for education
as well. Sounds complicated, it is! Wait to we begin to talk about Sallie Mae and
Navient, you will really see your head spin. But, I digress. Private loans, such as
banks or other bank like entities (Hedge Funds, or rich individuals who pool
money for better returns) offer student loans as well. Due to their creativity and
resources, they are able to offer advanced features, many of which you have
become accustomed to in your everyday banking. The majority of them, lately
such as Wells Fargo Bank and America offer a 6 month grace period, in which
payment are not due. This is a common feature you will find when you have
private student loans.
The banks criteria for providing student loans is a bit more stringent. There is a
chance you will not be eligible since they look at creditworthiness. But, where
there is a will there is a way, and many loans are provided by banks and other
financial entities with COSIGNING. Cosigning is very commonplace amongst these
loans, and parents and grandparents make up the majority of cosigners. Now not
only is the student on the hook to repay the student loans taken, but the parents
and grandparents are as well.
The interest rates for private loans are variable and subject to change. Believe you
me, they will change. They are based on the LIBOR rate (the London Interbank
Offered Rate), the rate banks charge one another for loans. The rate that most
credit worthy individuals could borrow, which is the Prime Rate. With the prime
rate, they will tack on some additional percentage points, based on a percentage
margin they have pre chosen. The rate and the percentage margin is strictly based
on what they deem is your credit worth. As with the market, the LIBOR and Prime
Rate will fluctuate, which will have a direct relationship on the interest rate they
charge you on your student loans. If LIBOR and Prime increase, or the market
takes a dive, best believe you will receive an increase to your interest rate on your
student loans.
Similar to the federal loans, the banks will disperse the funds to the college
institution, trade institution, or wherever you are attending. You can also borrow
up to the full cost of all your tuition and fees. The banks have no problem giving
all the money you need, and then some. They care less to any scholarship and
grant money. Because of this, they tend to provide more funding and disperse it

5. to your institution. Your higher education facility will provide you a refund to
conduct under your discretion.
As with federal student loans, overages is a huge problem. Many individuals take
this money as free money to spend, truly not aware of the dire consequences.
I have seen individuals use student loan overages to pay for frivolous items, as
well as costs to live on, such as living expenses, electric bills, gas bills, rent
payments, auto, and the like.
We have just reached the surface on “how student loans work?” but this provides
a good foundation of what you are getting into, or have gotten into when taking
out student loans.