The sad truth is that most students do not understand how student loans work and the impact they can have on their lives when they sign on the line to secure these funds to pay for college. Student loans make college possible for many young people who would not otherwise have the opportunity to attend college. However, they can create massive debt that can follow them around for life until it is fully repaid.

That doesn't mean student loans aren't highly beneficial to many borrowers. It does mean that it is worth choosing and accepting these loans with greater seriousness and a deeper understanding of their long-term consequences.

What is a Student Loan?

A student loan is money that is borrowed to pay for higher education. It can be used to pay for undergraduate or graduate studies, room and board, and books and equipment to further your education.

It's essential to see these loans in perspective, however. According to the Education Data Initiative, when you calculate interest, loss of income, and other fees, the average cost of a four-year college degree can exceed $500,000. That's the cost of buying a home in most areas. That means most students can expect to pay as much, if not more, for their student loan repayments as their mortgages – and for as long. The average U.S. mortgage is repaid in 30 years.

How Student Loans Work

The federal government also offers student loans with attractive benefits for qualified college students. Student loans can also be obtained from private lenders like banks, credit unions, and, more recently, crowd-funded initiatives. Student loans will have either fixed or variable interest rates. If a variable-rate loan is selected, students need to know how fluctuating interest rates may impact their future budget. This means that students will be wise to consider locking in lower interest rates rather than risking a much higher future interest rate that could prove costly.

As with any loan that carries interest, the sooner the loan is paid in full, the less interest you will pay over the life of your loan. That is in your best interest. Failing to repay your student loans can cause you to go into default. The consequences of which can be any of the following and more:

• Forfeiture of tax refunds.
• Inability to obtain a mortgage.
• Failure to receive future educational grants and loans.
• Low credit score.
• Higher interest rates on purchases.
• Failure to qualify for private credit lending for cars and credit cards.

Fortunately, there are programs to help mitigate defaults through various options, including temporary payment forbearance periods (interest will continue to accrue during this time, however), refinancing student loans and income-based repayment programs. The key is to act before you are behind on your student loan payments to avoid the potentially painful consequences of failing to act.

Types of Student Loans

There are a few different types of student loans from which borrowers may choose. Some borrowers take out different student loans if one loan is insufficient to cover education costs. The more debt you accrue in pursuit of education, the more you must repay when your time of learning ends. These are some of the types of student loans you might consider.

Federal and Private Loans

Federal student loans can only be awarded to students who fill out a specific financial aid form known as FAFSA (Free Application for Federal Student Aid). That is the first step in obtaining a federal student loan offered by the U.S. Department of Education. Private lenders, such as banks or credit unions, will require their own applications to be completed.

For those who qualify, though, the federal student loan program offers a few notable benefits to borrowers, including lower interest rates and fewer eligibility requirements. One of the most essential requirements for federal student loans is that students provide documentation proving they cannot afford college without this assistance. This includes information such as bank records, parental tax returns for some students, and personal tax returns for others.

Another massive benefit for students seeking federal student loan aid is that many universities have financial aid offices that will assist students in filling out and submitting FAFSA documentation if needed.

Subsidized and Unsubsidized Loans

Beyond the federal vs. private student loan debate, you must consider whether to pursue subsidized or unsubsidized student loans. Understanding the differences between the two can be instrumental in helping you decide.

With a subsidized federal loan, the government pays your interest until you are no longer in school (or drop below the required minimum semester hour load) and must repay the loan yourself. Unsubsidized loans are only available to students who have shown sufficient need through their FAFSA forms.

Unsubsidized student loans, on the other hand, do not require demonstrated need. However, the government doesn't cover the interest, which begins accruing the day the money is dispersed to the university. The longer interest accrues on your student loans, the more you will ultimately pay for your education.

Benefits

The benefits of student loans are immense for those who take advantage of them to pursue financially rewarding careers. They provide the ability to obtain the education necessary to excel in these fields. With higher education costs rising yearly at alarming rates, most U.S. students could not attend college without student loans and other financial assistance, such as grants, scholarships, work-study programs, and more.

Drawbacks

The main drawback to consider with student loans is that they must be repaid. Unfortunately, the rapid increases in education costs compared to the low starting wages of recent graduates are forcing many students to make painful financial sacrifices or risk defaulting on their student loans. If interest rates rise, the future is grimmer for many recent grads and those still in college, and it is even worse for those who were forced by circumstances to withdraw from college before earning their degrees.

Tips for Using Student Loans Responsibly

Establishing educational and financial priorities is the most important tip for using student loans responsibly. Pursue fields of study that are financially lucrative and commit to remaining in school until you get your degree. Then begin making payments immediately to mitigate interest costs and avoid default.

If you have financial hurdles to overcome, immediately contact your lender about the possibility of a forbearance or deferment or to discuss your refinance options. Also, consider asking if you qualify for student loan forgiveness through public service. The one thing you want to avoid is the default on your student loans. Exhaust every avenue open to you before risking this outcome.

Alternatives to Student Loans

Student loans can be painful but necessary tools for pursuing higher education. There are some alternatives to consider, though, including the following:

• Choose lower-cost educational institutions.
• Apply for scholarships.
• Apply for grants.
• Work for organizations that offer educational payments as a benefit.
• Consider community or technical colleges for high-paying "blue-collar" programs.

The key is to graduate college with as little student loan debt as possible. The less you have to repay, the lower your risks of default and the negative consequences defaulting on your student loans delivers.