paying cash vs. taking out student loan

[nkereina]

Hi all - first post here, so please forgive me if I'm in the wrong spot!

I need some help understanding student loans better. My undergrad was paid for out a college fund so I never took out any loans during undergrad. I am now considering grad school, and my parents have graciously offered to help me pay for it so I don't have student loan debts after graduation. They have enough cash on hand to pay for my first two semesters, and by the time the bill comes for my last two semesters, they will have enough cash to pay for those. However, from the little I know, since I do not make much money at my job, I am under the impression that if I fill out FAFSA and apply for loans, I may be eligible for financial aid and/or grants and/or scholarships that would lower my cost that I would not have to pay back. Am I understanding this correctly? If so, that means my total cost would be less so I should go this route rather than have my parents pay cash straight up, yes? Taking out loans would also be beneficial to me because I am hoping take out slightly more for some living expense money since my hours at work will be cut when I begin school. My next question is if I take out loans, could my parents pay on my loans while I am still in school before the interest starts accruing? Are there penalties for this? Of course it would be silly to pay interest on loans when we have the cash for it, so I am trying to figure out the best pay off solution if I go the loan route.

Thanks for any and all advice/suggestions!!

[long_time_lurker]

You may as well fill out FAFSA and see what happens. It's free.

Grants are few and far between for grad school. If you get that kind of aid it's going to be merit aid which often isn't governed by FAFSA anyway. However the FAFSA will help you obtain a subsidized loan (at least until July 2012, then there will be no more subsidized loans). You can also get an education loan from someone like Discover Student Loans (that's who I used and they were great) for lower rates than the government offers, something like 3.5%. Those accrue interest immediately though.

Also, at least where I did my loans, there was no prepayment penalty. In fact, I actually paid off a loan in full the same semester (thank you Netflix stock!).

I will say though that you're almost always better off paying up front and not taking loans. Then you're not paying interest. The exception is if the money is invested somewhere earning more than the interest you are paying. In my case, I would have been better off hanging on to the stock, but I didn't want to keep paying 6.8% interest on 20 grand.