Student loans are made for the sole purpose of helping students pay for their education and related expenses. Most lenders allow students to delay their payments until after they graduate or drop out. But these loans are expected to be repaid, with interest.
While student loans can help you afford a steep college bill, there are many pitfalls they present as well. Unlike almost any other kind of loan (credit card advances, mortgages, etc.), it is very difficult to free yourself of student loan debt if you get into financial trouble and file for bankruptcy.
The federal government can even wait until you retire and take some of your Social Security payments to recoup its loans. That's why it's important to keep your borrowing to an absolute minimum, and, after you leave school, make sure you make your payments on time.
Here are three basic types of student loans:
The U.S. Department of Education will lend at least $5,500 a year to just about any undergraduate, without requiring parents to guarantee repayment and with almost no regard to the student's credit history.
In 2012, the government was charging between 5% and 7% for its student loans. It offered several repayment options, including "income-based repayment," and "pay as you earn," which link your monthly payments to your earnings. And it offered public servants a chance for some loan forgiveness.
There are a few kinds of students the federal government won't make loans to, however. Those include undocumented students, or those who have already defaulted on a previous federal student loan.
Many banks and private companies, like Sallie Mae, which is no longer run by the government, also make student loans. These are standard lending transactions that are very similar to, say, auto loans.
Loans from private lenders are generally less advantageous to students for several reasons. Private lenders won't make loans directly to college students because they have limited credit histories and are unable to prove they'll be able to pay the loan back. As a result, lenders often require parents to "co-sign" or guarantee in writing that they will pay back the loan if the student fails to do so.
In addition, private student loans generally aren't eligible for public service forgiveness programs, in which graduates who work for non-profits or government agencies can have a portion of their loans erased.
A few charities and colleges offer low- or, in some cases, no-interest student loans. These are comparatively rare, however. And not all college-made loans are good deals.
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