Student loans, one of the major components of college financial aid, are readily accessible and available to most college students. The loans fall into two categories: federal loans and private bank loans. The two types of loans differ in a number of ways; but federal loans are, by far, the better deal for most college students.

A recent overhaul of the federal student loan program removed most of the private bank incentives; so that student loans are now primarily regulated and managed by the federal government. The advantage is that students are now assured of relatively low interest rates over a 10 to 30 year repayment period, with the possibility of deferring repayment as long as they are enrolled in school at least part-time. In addition, federal student loan approval is not based on credit worthiness, as it is with private bank loans; so there is no need for a credit report or credit qualifying process. They offer generous repayment options; and students are not required to begin repayment until six months after graduating or leaving school, whichever comes first.

There are unique opportunities for a small percentage of federal student loans to be forgiven, but only when specific and limited criteria are met. Once loan repayment begins, if students experience financial hardship, they may request an extension of the repayment period, changing it from 10 years to as much as 30 years. Or they may ask for a deferral until the hardship situation has been resolved. There is a great deal of flexibility with federal student loans that cannot be expected from private lenders. However, students may borrow only the amount designated in their financial aid package, with freshmen receiving the lowest allowable amount. Graduate students are eligible for higher loan amounts than undergraduates.

Private bank loans are available to students who qualify for them, based upon credit worthiness. Banks may offer variable interest rates, instead of fixed rates, which could cause loan payments to rise in the future, well beyond what students may expect. However, banks are usually willing to loan students more money than the Federal Student Loan Program, which some students may find helpful. Students may need parents to co-sign for bank loans, if they have not established adequate credit, adding an element of financial risk to their parents, who become co-borrowers. Students should first apply for federal student loans, which provide better interest rates, loan repayment terms, and flexibility than private bank are able to offer.

Although horror stories abound in the news, student loans are not the bad guys. These loans make it possible for students to invest in their own future and move forward in a career of their own choosing. If students are diligent in their studies, they should earn a college diploma and compete successfully for higher-paying jobs that enable them to systematically pay back their student loans. Students should research the salaries of the career field they intend to enter, so they can plan their student loan debt accordingly. They should balance the proposed student loan payment against what they expect to earn, rather than borrowing more than they can expect to repay. In the long run, they will then be able to avoid any financial pitfalls associated with their student loans.