Education costs money! It’s a simple, but sad fact. Sad for those who don’t have the money. After all, how can they get ahead in life? How can they move up on the corporate ladder? How can they earn the money a professional earns?

Doesn’t every parent want his child to get a good education? Doesn’t every mother and father want their sons and daughters to become doctors, lawyers, rocket scientists – just something that’ll earn them a rewarding income (and then maybe the kids will take care of the parents!). But how can that possibly happen when the road to that success is paved with gold – gold that they have to pay! It just doesn’t seem fair.

But hold on. You have the backing of your federal government. They understand the challenges you meet while trying to get an education. They know that costs are continually rising, making it harder and harder for you to afford higher education. And they’re on your side. They’ve created a number of financial aid programs to help you get that education you so strongly desire. A number of those programs involve student loans.

We’d like to give you the basics of how student loans work. We’ll be looking predominantly at the U.S., but the same type of programs are available in most countries around the world.

How do you raise that money for education?

There are many ways you can come up with the money you need for a college or university education. Let’s explore a few of them:

• Need-based aid: Need-based aid was designed to determine your eligibility for financial aid based on your situation. A number of factors are examined and a decision is based on those factors. Some of the more important factors taken into account in a need-analysis are:
  • Family contribution towards the cost (usually a percentage of their income).
  • The number of siblings attending that school.
  • The student’s contribution. These figures are subtracted from the cost of education to determine the amount of aid the family is eligible to receive. There are many inconsistencies in this system – that is, many differences, depending on what school you’re applying to. But never hesitate to apply – you may be surprised at how it works out.
• Scholarships: Here’s an option available to those fortunate enough to have talents that colleges and universities want – students who can help make a good name for the school. And in return for helping build the school’s reputation, education costs are partially or completely covered by the school. But that option’s open only to a favored few.
• Work-study programs: Work-study programs are a great way to help students help themselves. A large percentage of students in college or university work their way through school. They juggle their studies with a part-time job, earning enough money to help cover their educational costs. The government recognizes the conscientiousness of these students and believe they deserve a reward. That reward is work-study programs. The government pays a large portion of the student’s wages in an agreement with the employer. The money still ultimately comes from the government, but the students learn values that’ll help them later in life.
• Student loans: Student loans are widely varied in structure and terms. We’ll look at some of them in more detail.

Student loans attract more students

Again, the purpose of financial aid is to get more students into those seats, learning. But there’s also the business of education to think of. Especially in the U.S., college education is a fairly competitive business. Every school wants to attract the best students so they can gain a reputable position in the eyes of the public. That’ll attract more students and more students means more profit. And one way to attract students is to make it easy for them to attend their school. So student loan programs are important to them.

Education can be paid for up front, during the education process, or after graduation. Only the very wealthy can afford to pay cash for education – the bill could reach around $60,000, or even as high as $100,000 for extended programs, like high-paid professionals. So some kind of a loan is usually in order. If the loan is made during the student’s term in school, it’s rarely paid before graduation. Some parents will mortgage their home with an equity loan to pay for their children’s education.

And then there are the student loans that don’t have to be paid until after graduation. These are the most common form of student loans. The source of the funds for these loans has always been, ultimately, the government. But governments are cutting costs and one of the first things to go is student loan expenses. To compensate for the loss in government funding, around 25% of colleges and universities in the U.S. have become Direct Loan Schools, offering student loans with their own funds.

So, either way, you can still get a student loan – quite easily, in fact. There are many advantages to student loans, as opposed to conventional loans. For example, interest isn’t charged until repayment starts. The repayment period can be up to 10 years. The interest is government-subsidized at a rate of 5%-8.5%. And the actual application process is fairly straightforward.

What do you have to do to apply for a student loan?

Let’s follow the procedure for applying for a student loan in the U.S. First, you need to complete a Free Application for Financial Aid (FAFSA). Then you must choose which type of student loan you want. There are two major loans available from the U.S. government. They are:

• Perkins: With a Perkins loan, you can borrow $4,000 per year. All you need to do is sign a Promissory Note.
• Stafford: A Stafford loan allows you to borrow $2,625 the first year, $3,500 the second year and $5,500 the third and fourth years. The funds usually come from banks or other lending agencies.

There are many variations on these and other student loans. For example, if you don’t qualify through the FAFSA, you can get a Stafford loan, but you have to pay interest from the time you receive the money. You can accrue this interest until the end of the repayment term if you want.

Parents are encouraged to help out

Governments believe that parents are ultimately responsible for the cost of educating their youngsters. But, as we mentioned before, that’s not always possible. One type of student loan available is actually a parent loan. It’s called the Parent Loan to Undergraduate Students (PLUS), and carries a higher interest rate because the interest isn’t subsidized by the government. Payments start 60 days after getting the loan. These loans are usually made by higher-income families; that’s probably why their credit reports aren’t looked into too deeply.

Parents are also encouraged to plan with their children – and plan early. There are a number of Education Savings Plans available these days. That’s one option. Another is to just start saving on your own – with discipline and consistency. Discuss your children’s futures with them as soon as they’re ready. If you decide that they want to attend college or university, plan for it. They can get summer jobs. They can save up their “allowance”. If a college education is important to you and your children, make it important! Do whatever you have to do to make it happen. Remember the old saying, “If it’s to be, it’s up to me.”

Make your student loan a friend, not an enemy

Student loans can really be your friend. They’ll be there when you need them. They’ll help you through the rough times. But don’t abuse them. Don’t take advantage of them. Be disciplined in repaying them.

If you find yourself in trouble with your student loan, don’t hesitate to contact your financial aid office. They’re there to help. They can give you advice on budgeting. They’ll do everything within their power to get you through your challenges.

Take special note of this: Cost of Education = Bankruptcy? It can. It doesn’t have to, but it can, if you’re not diligent. Studies show that almost 100,000 bankruptcies were filed by people under 25 years old – many of those recent graduates. There are many programs designed to help the struggling student with debt. The U.S. government has even introduced a Student Loan Consolidation program to help those who have multiple student loans and are finding themselves burdened.

Student loans are a wonderful way to get the education you want and deserve. Do your homework, and you’ll find that financial aid is indeed available to help you towards success.