What is an 'Education Loan'

An education loan is money borrowed to finance education or school related expenses. Payments are often deferred while in school and for a six-month grace period after graduation.

BREAKING DOWN 'Education Loan'

Education loans are loans issued for the purpose of attending an academic university and pursuing an academic degree. Education loans can be obtained from the government or through private sector lending sources. Federal loans often offer lower interest rates. Some also offer subsidized interest. Private sector loans generally follow more of a traditional lending process for application with rates typically higher than federal government loans. (See also: An Introduction to Student Loans and the FAFSA and College Loans: Private vs. Federal)

Federal Student Loans

Most borrowers seek federal government funding first if they need to borrow funds for education expenses. Thus, the first step in seeking education loans is completing a free application for federal student aid (FAFSA). Varying information will be required for each applicant depending on their situation and parent dependency. A credit check is not generally required and the amount of principal on the loan or loans is primarily based on the school a student will be attending. Once a FAFSA form is completed the government will work with the schools listed on the application to identify the financial aid package that the student is eligible for.

Various types of federal student loans exist including: direct subsidized, direct unsubsidized and direct consolidation loans. If offered and accepted, funds will be issued by the federal government to the specified university to cover academic bills. The remainder of the funds will then be disbursed if available. Subsidized loans pay a borrower’s interest in school while unsubsidized loans will have deferred interest.

Private Student Loans

In some cases a student loan package issued following a FAFSA form completion may suggest the borrower apply for additional funds through private lenders. These types of loans will follow more standardized private sector lending applications with a credit check usually required.

Borrowers can apply directly with individual private sector lenders for funds. Similar to federal funds, the application will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover pending bills with the remaining amount of principal sent directly to the borrower.

Future Considerations

Accumulating debt in college can be an overwhelming expense to deal with upon graduation. Thus, students should consider all of their options before signing up for debt that could be overly burdensome. Some alternatives to loans may include working part-time, accepting work study offers, working in a job that offers tuition reimbursement as a benefit, attending a lower cost school or applying for scholarships that help to cover the cost.

Upon graduation borrowers will be required to begin payments on their student loans, typically after a six-month grace period. If a borrower received numerous student loans then consolidating the loans can be a good option for more easily managing debt. Many lenders now allow a borrower to consolidate both federal and private loans together. A number of employers are also beginning to integrate consolidation services and student loan payment benefits into their employee benefit programs to help increase the support available for managing student loan debt after college. (For more, see also: 10 Tips for Managing Your Student Loan Debt)

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