Components of Loans

Early this month, we briefly mentioned loans, but what is a loan and what must a student look out for when considering one to pay for their higher education? To that I say, “Do not fear; we will show you the ins and outs of loans here!”

A loan is when a party borrows money from another with the agreement that the amount (plus a percentage) will be repaid to the lender. There are three basic components of loans: interest rate, term of the loan and security.

The interest rate is basically the extra amount the lender is charging the student to borrow their money. This is usually a percentage of the total amount loaned and can range greatly. The lower the interest rate, the better. It is very important that the student understands the exact amount of money that the interest is adding on to the loan, because it adds up quickly. There are two types of interest rates: fixed and variable. Fixed rates will not change throughout the life of the loan; on the other hand, variable rates will change depending on market conditions.

The term of a loan dictates the maximum amount of time the student has to pay the loan plus interest back in full. The term of a loan can be anywhere from 1 to 30 years. It is important to note that loans can be completely paid off before the term with no repercussions. The term of the loan will affect the student’s monthly payment, so it is something that will depend on the individual student.

Loan security is either secured or unsecured. A secured loan requires a collateral. This means that if the student does not pay the loan, the lender can keep that collateral. This guarantees that the lender will somehow get their money back. Contrarily, an unsecured loan requires no collateral so the lender cannot make their money back if the student does not pay back. However, unsecured loans usually have a higher interest rate because of the risk taken by the lender.

There is no universal correct way to decide on a loan. It depends solely on the individual student and their financial situation.

Look out for our next blog post to learn about the different types of student loans available.

Join us at World Future Forum for more research findings and best practices on student debt!

FAFSA 101

Financial aid is money awarded to students pursing a higher-level education such as attending a technical school, community college or a four-year university. This money can be used to pay for tuition and fees, housing, transportation, school supplies and books.

The Free Application for Federal Student Aid, or FAFSA, is required to receive federal financial aid. It determines how much financial help you qualify for from the federal government. Many universities require students to submit a FAFSA to determine how much financial aid they will provide as well. Therefore, FAFSA is a crucial part of the college admission process.

Does your student qualify for federal financial aid? Your student must: 

  1. be a citizen or eligible non-citizen of the United States of America
  2. have a Social Security Number
  3. have a high school diploma or equivalent
  4. be enrolled in a higher education institution as a regular student
  5. maintain satisfactory academic progress.
  6. not owe a refund on a federal student grant or be in default on a federal student loan.
  7. if male, be registered with the Selective Service System
  8. not have a conviction for the possession or sale of illegal drugs for an offense that occurred while you were receiving federal student aid

What does your student need to complete their FAFSA? 

  1. Federal Student Aid (FSA) account
  2. Social Security Number or Alien Registration Number (for non-U.S. citizens)
  3. Federal income tax return (W2 or retrieve from IRS Data Retrieval Tool)
  4. Bank account statements (if applicable)
  5. Records of investments (if applicable)
  6. Records of untaxed income (if applicable)

Note: If your students are dependent, they will also need the above information for their parents or legal guardian.

The FAFSA application for the upcoming academic school year opens every October 1st. The deadline for FAFSA is officially June 30th; however, it can be earlier for your students if their institution uses it to offer college aid. The deadlines set for each college can usually be found on their website.

It is important to note that the FAFSA is awarded on a first-come, first serve basis. If you have students who will be attending a higher education institution during the 2019-2020 school year, encourage them to complete the application at fafsa.gov,  print out the PDF version here or even download the app version!

Join us at World Future Forum for more research findings and best practices on student debt!