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Student Loans 101

JEN: But I thought you got that scholarship or whatever!

EDDIE: Well, yeah, but that doesn't cover everything. It's just… kind of hard to know what the best option is.

LUNCH LADY: Mac & cheese.

EDDIE: Excuse me?

LUNCH LADY: The best option today is mac & cheese.

JEN: We're actually talking about student loans. 

EDDIE: Yeah, for college. 

LUNCH LADY: College, huh? If you ask me, student loans are the Meatloaf Surprise of post-secondary education. A lot of students opt for it without understanding the risk that lies ahead. 

EDDIE: That can't be good. 

LUNCH LADY: Student loans come in two basic food groups: federal and private. Federal student loans are government-funded. Private student loans can come from banks, credit unions, schools or other private institutions. The interest rate for federal student loans is set by Congress. It's a fixed rate that's often lower than private loan rates. The interest rate for private student loans varies from lender to lender. They're often variable-rate loans, which makes them unpredictable and potentially more expensive than federal student loans over time.

EDDIE: Uh, can you tell me about your subs?

LUNCH LADY: Subsidized student loans? Sure!

EDDIE: I was asking about the sandwich in this case, but please continue.

LUNCH LADY: Certain federal student loans, such as the Perkins Loan, are government-subsidized. This means that the government pays the interest on your loan while you're in school and for a grace period—usually 6 months—after graduation. 

JEN: What? That's awesome!

LUNCH LADY: Private student loans are not subsidized, so interest starts accumulating from day one and you're responsible for paying it—even while you're a student. Be aware that not all federal student loans are subsidized. The Stafford Loan, for example, is a direct unsubsidized loan. You're still borrowing money from the government, but you're responsible for paying the interest that accrues during your time at school.

JEN: Hmm… in that case, I want the sub one. 

EDDIE: Well, it's not that simple—you need to make sure you qualify for the loan you want.

LUNCH LADY: There is a range of federal student loans available, and they all have their own eligibility requirements. Some of the criteria are very basic, like being a full-time student and maintaining good grades. Other loans are only available based on financial need.

EDDIE: FAFSA is a free application you submit to find out if you qualify for financial aid.

JEN: Do private student loans have all this eligibility stuff?

LUNCH LADY: Although private lenders don't tend to factor in your financial need, they may have other requirements similar to those associated with regular personal loans. You may need to have a good credit score, for instance, or have a parent co-signer.

EDDIE: There are lots of options out there to choose from, but what I'm worried about is what happens after graduation. 

JEN: Oh, I know what happens—you and your classmates throw your square hat-things really high in the air and everybody cheers. 

EDDIE: No, Jen, I meant paying back the student loan.

JEN: Ohhhh. Yeah, that's definitely more worrisome.

LUNCH LADY: Repayment is an important factor to consider. Federal student loans generally provide more flexible repayment options than private student loans. Options include standard fixed payment plans, graduated payment plans where your payments increase over time as you build your career, and income-based payment plans. Federal loans are also easier to consolidate.

EDDIE: Consolidation is when you combine multiple loans into one single loan.

JEN: I'm guessing that private student loans don't have as many repayment options.

LUNCH LADY: Private lenders tend to be more rigid when it comes to repayment, and private student loans can be trickier to consolidate.

EDDIE: I told you! There are so many things to consider!

LUNCH LADY: Don't forget to compare additional factors like loan fees and borrowing limits. 

JEN: Ooh, try and get one with no borrowing limit.

EDDIE: That's actually a terrible idea.

JEN: What!

LUNCH LADY: Take my advice, kids. Only borrow what you truly need, because just like these extra-spicy buffalo wings, though it might seem like a good idea to load up, you will definitely pay for it later.

JEN: Eww.

EDDIE: That's nasty.

LUNCH LADY: Certain federal student loans are government-substidized… substa… subsidized.

DIRECTOR: Cut. Let's do this again.

LUNCH LADY: But that's a long thing to say.

DIRECTOR: I need you to concentrate.

LUNCH LADY: That's a hard word to say.

DIRECTOR: Take two.

LUNCH LADY: I'm only a Lunch Lady.