Experts: Students Should Take Interest in Deciding on Loans

Many college students, struggling to save cash for tuition, housing and books, understand this sentiment firsthand.

To make up for the lack, the University Office of Scholarships and Student Aid distributed more than $59 million in grants, scholarships, loans and work study this year.

But Susan Burdick, assistant director of scholarships and student aid at UNC, warns students to think carefully before applying for student loans.

"It is always best to look into grants and scholarships first," she said.

Before making the decision to ask for a loan, she suggests that students evaluate their financial situation and make sure it is necessary.

The amount of any student loan cannot exceed a predetermined budget including tuition, books, room, board and various expenses.

But Burdick said she has noticed an increasing trend among students who take out larger loans in order to maintain a higher standard of living. By using loan money to pay for tuition and housing, students choose to free up their own money for luxury items, she said.

"There is a maximum that can be borrowed. A student can't walk in and take out a second loan because they want to go to the Bahamas this year," she said.

Burdick emphasized that she counsels students to settle for the minimum, not the maximum, dollar amount.

"If a student qualifies for $9,000 but can get by on $8,000, we encourage them to borrow $8,000," Burdick said.

According to the financial aid services Web site, more than one-third of all students at UNC receive some type of financial support. And more than half of college students around the country receive a form of financial aid.

Each year students seek aid, they must complete the Free Application for Federal Student Aid. These applications are reviewed by the U.S. Department of Education and the University Office of Scholarships and Student Aid.

The financial aid office recommends an aid package that can include loans, grants, scholarships and work-study jobs. The loan amount is calculated using a government formula based on a family's size, total income and assets.

Depending on the degree of a student's financial hardship, there are three types of student loans available: Federal Perkins Loans, Federal Stafford Loans and Alternative Loans.

Tabatha Turner, assistant director for client services in the financial aid office, said the Perkins loan is the best of the two federal loans. "The Perkins loan is the best because it has a fixed interest rate at 5 percent and a nine-month grace period. The Stafford loan, on the other hand, has a variable interest rate and only a six-month grace period."

Two types of Stafford loans are available: subsidized and unsubsidized. Subsidized loans excuse students from paying interest during school and an allotted post-graduation grace period. Unsubsidized loans charge students interest for the whole life of the loan.

Students who do not qualify for need-based aid have the option to take out a private or alternative loan.

But Burdick said students should shop carefully for private loans. "Make sure you get a loan from someone who has good service," she said. "If you call, you want to know there's someone on the other end who cares about your problem."

No matter its source, Burdick said understanding the terms of a loan is the best way to avoid unpleasant surprises during the repayment period.

But students do not always follow this advice.

Burdick said most students have no idea how much they owe, like sophomore biology major Matt Robinson, who admitted that the details of his loan are more than a little hazy to him.

"I know nothing about (the loan)," he said. "My parents deal with it. They just say that I'll have to pay after school."

Students with this attitude are more likely to miss inconsistencies in loan paper work. "Lenders make mistakes, too," Burdick said.

Each loan has specific conditions concerning disbursement dates, interest rates, fees, amounts owed and repayment dates. These terms are outlined in three documents -- the promissory note, the approval disclosure and the repayment disclosure.

The conditions of loan repayments and borrower fees are outlined in the promissory note, which must be signed before applying.

If the loan is approved, the student will receive an approval disclosure.

A repayment disclosure is sent shortly before the repayment period begins, typically soon after graduation.

Because of the Stafford and Perkins loans grace periods, borrowers have a little leeway after graduation to find jobs and begin making payments.

Students are allowed up to 10 years to repay the loans, though Burdick said her staff encourages students to pay them off as quickly as possible because as interest accrues over time, borrowers end up paying significantly more than the original loan amount.

For need-based federal loans, students also receive a break on origination fees, usually 3 percent of the total. For example, if the loan amount is $3,500, the borrower actually receives $3,400 after the origination fee.

Loans from private institutions also differ from federal loans because they have stricter schedules for repayment.

While most student loan payments are deferred until graduation, some, like those available for the Carolina Computing Initiative, must be repaid while the borrower is still in school.

Private, non-need-based loans also might begin accruing interest while the student is still in school.

To keep track of all these factors, Burdick advises students to take charge of their finances as early as possible. She recommends creating a personal budget each semester based on all the money and possible expenses a student has. She said, "If you're running out of money by October, then you're in trouble."

The Features Editor can be reached at features@unc.edu.