Regional College Access Center

Taking out loans

Nadir says: I have one subsidized loan and one unsubsidized loan. The unsubsidized one is already accruing interest while I'm still in school. Fortunately, both of my loans are federal Stafford loans, which means that the interest rate is pretty good—just 6.8%.

Interest rates were pretty much gibberish to me until I sat down with a loan calculator tool and plugged in some numbers. A few percentage points doesn't sound like much... but it is.

What is a loan?

Loans for education are much the same as other kinds of loans. An organization such as a bank will agree to give you money on the condition that you pay them back that money, plus an additional amount (usually a small percentage of the loan).

Not your first choice

Scholarships and grants can lower your college costs, and unlike loans, they do not need to be paid back. It's always best to pursue that kind of "free" funding first. Loans should be your last resort for financial aid.

However, taking out loans is not the end of the world. Competition for financial aid can be fierce, and not every student is able to secure enough to pay for all their college expenses. Loans let you continue your education, and that's critically important. If you've read our page about how college pays you back, you know that college graduates tend to make far more in their future careers than individuals without a college degree.

If you need to take out a loan, make sure you do your homework beforehand. The terms of loans—the rules governing when you have to pay them back, and how much interest you must pay on them—can vary a great deal, and the difference between a smart loan decision and a poor loan decision can be dramatic.

Some key terms

Loan agreements are very detailed and use specialized language to describe the rules of the loan. Here are some basic definitions of four important terms that you are likely to see:

Government loans

There are four main types of loans that the U.S. federal government offers to students who qualify after filling out the FAFSA:

Private loans

If you are not awarded sufficient financial aid (including government loans) after submitting the FAFSA, you may want to apply for a private loan. You can get college loans from banks, directly from colleges, and sometimes from other private organizations. SimpleTuition.com and eStudentLoan.com are two sites that let you search for loans from multiple lending agencies. The College Board has a very good information section about loans as well.

Be careful when applying for a private loan. Read the fine print. Remember that lending agencies exist to make money off of the interest they charge you! The federal government offers relatively low interest rates on its loans, but private lenders can and do charge much more. The difference between a loan at a good rate and a loan at a higher rate can be many thousands of dollars over the course of repayment. Experiment with this loan calculator to decide what kinds of loans you can really afford.

One final caution about loans. Missing payments on your loans once the period of repayment begins can really hurt your credit rating. Bad credit makes it much harder to get loans when you need them, for things like a car or house. Having bad credit will also drive up the amount of interest you have to pay on future loans, because lenders see you as a risky investment!