Student Loan Basics

Before You Borrow a College Student Loan

Most people use a combination of savings, income and loans to pay their college costs. Consider all your options before borrowing money that you will have to repay with interest over a specific time period. If you decide to borrow to cover part of your education expenses, educate yourself first and remember to maximize federal student loans before you take out private loans.

The following are some important concepts to understand when evaluating college loans:

  • Fixed vs. Variable Interest Rate: Fixed interest rates do not change over the life of a loan, which means you pay the same amount each month. Variable interest rates change over time in line with market interest rates.
  • Annual Percentage Rate (APR): The APR reflects the total cost of borrowing money over the life of the loan, considering not only the interest rate but also the effect of other fees on the total cost of repaying the amount financed.
  • Immediate or Deferred Repayment: The interest rate of your loan may vary depending on whether you repay the loan immediately or wait until after graduation to start repaying.
  • Tiered Pricing: Tiered pricing means that interest rates depend on your credit. The advertised lowest interest rate may only be available to those with exceptional credit, and higher rates and fees may apply to those with fair to average credit ratings.
  • Origination Fee: Lenders often charge an administrative fee as a percentage of the loan amount. Sometimes the origination fee is added to the amount you borrow and other times it is subtracted from your loan amount.

Tax Credits and Deductions

The federal government offers tax credits – like the American Opportunity Credit and the Lifetime Learning Tax Credit – and tax deductions for certain college expenses to ease the burden of college costs. These tax advantages are based on your Adjusted Gross Income and other qualifying criteria. Check the IRS Higher Education site for more information.