Student Loans 101: The Basics

My financial dilemma has inspired me to rant about student loans for a few posts. Bear with me. 

I've been debating how granular I want to get into this topic as I'm not sure how much is too much. Here goes...

Here's some basic definitions:

Loan: (noun) something lent or furnished on condition of being returned, especially a sum of money lent at interest. In this case, it's definitely a sum of money.

Principal: (noun) the sum of money lent to a borrower. This is the amount of money you receive from a financial institution to pay for your cost of attendance. 

Interest: (noun) a charge for the use of borrowed money. This is the cost of money to you, or in other words, how much you have to pay to borrow the initial principal. 

There are two major institutions that provide student loans, the federal government and private industry. I want to first focus on federal loans. There are subsidized and unsubsidized loans. 

Subsidized loans are ones that are provided to students who are currently attending school and can be used towards tuition, books, room and board, etc. Students need to demonstrate financial need in order to be eligible.

Unsubsidized loans are very similar but students do not necessarily have to demonstrate financial need. 

The big caveat for these loans is that while the student is attending school full time subsidized loans aren't accruing interest, unsubsidized ones are. The federal government "covers" the interest earned on the subsidized loans so that once your loans hit repayment time you don't have this huge outstanding interest payment before you start hitting the principal of your loan. If it's unsubsidized, interest has been calculated and accruing your entire school career. Here's a little example:

Let's say you borrow $1,000 for your freshman year of college at 10% interest. At the end of your first year, if that loan was subsidized, you'd still only owe $1,000. But if that was unsubsidized you'd owe $1,100 because $1,000 multiplied by 10% (or .10) is $100, plus the initial $1,000 is $1,100. At the end of your senior year, if you decide not to borrow any more money, the subsidized loan would have an outstanding balance of $1,000. The unsubsidized loan would have an outstanding balance of $1,400 (provided the unpaid interest is not capitalized).

I feel like I might have thrown a curve ball at you. What does capitalized mean? Basically, after a certain time, an institution can say, well I haven't received this money (the $100) so I'm going to consider that part of the outstanding loan and charge interest on that as well. Instead of just having $1,000 as your principal amount, you'd then have $1,100. Then they could start charging interest on $1,100, costing you $10 extra dollars a year. You can see how this snowballs out of control when you don't pay your interest year after year and you're borrowing a lot more than just $1,000.

While in college full-time, or at least half-time, your loans are in deferment. Meaning that you don't HAVE to pay on them. You CAN pay on them, but there's no obligation to. After you graduate college, or drop below half-time, federal loans go into a grace period, which is six months, before you have to start paying up. After these six months you have to bend over and give it to the man.

Which is where I am. Once you graduate, subsidized, unsubsidized, it doesn't matter. You're paying them both back and they're treated as equals. It's just for that short, blissfully ignorant time in school that the distinction matters.

Private loans suck and I advise you never to get them. While you can use them on whatever you want, literally you could buy a car with them, private loans have any terms that tickles their fancy. Ryan's private loans were in deferment for five years. It didn't matter that he's still in school, they came due when the five year time frame was up. Private loans typically aren't subsidized and you're accruing interest the entire time you're in school. Another WONDERFUL thing about private loans, they may not lock you into a rate. Ryan's are adjustable and the payment changes every single month.

Sometimes I wish I could go back and smack some sense into him. But isn't the saying, "God bless the broken road?" I love him, but he was stupid with money.