Student loans shouldn’t be your first choice, but sometimes they are necessary to help pay for college. If you’re smart about it, borrowing loans can be a worthwhile investment into your future.
It’s important to apply for financial aid by completing the FAFSA. Your school will take the information on your FAFSA to determine your financial aid package. We always recommend that you explore all your free options first, like grants, scholarships, and your own savings. If that’s not enough, then it’s time to consider loans. If there are any loans offered to you from the federal student aid program, or from your school, do your research before accepting the award! Not all loans are the same, and some may have more beneficial terms than others.
It’s up to YOU to make sure YOU know what YOU committed to. If you are borrowing a loan, that loan can be part of your life for more than ten years…think about how long that is!
When choosing student loans to pay for college, it is always best to start with Direct Federal Student Loans (sometimes called Stafford Loans). That’s because federal student loans come with certain benefits that private student loans do not offer, such as generous periods of deferment and forbearance, and income-based repayment plans and public service loan forgiveness for those who qualify.
There are three primary types of federal student loans each with their own unique characteristics.
A Direct Subsidized Loan is a fixed-rate federal student loan only available to undergraduate students. Demonstrated financial need is required in order to qualify. With a subsidized student loan, the government pays your interest while in school, during your grace period, and during periods of deferment. The interest rate for a Direct Subsidized Loan is the same for all borrowers and is currently 2.75%.
A Direct Unsubsidized loan is a fixed-rate federal student loan for undergraduate and graduate students. Demonstrated financial need is not required in order to qualify. With an unsubsidized loan, you are responsible for the interest that accrues while you are in school, during your grace period, and during periods of deferment or forbearance. The interest rate for a Direct Unsubsidized Loan for undergraduate students is currently 2.75%. The interest rate for a graduate student is currently 4.30%.
A PLUS Loan is a federal student loan designed to help graduate students and some parents pay for college.
A parent PLUS loan is available to the parents of dependent undergraduate students to help their child pay for college. To be eligible, a parent cannot have adverse credit history as determined by the program (note: this is not the same as a credit check for a private student loan, which is much more stringent). The current interest rate for a parent PLUS loan is 5.30%.
A grad PLUS loan is available to graduate students to help pay for graduate or professional school. To be eligible, a student cannot have adverse credit history as determined by the program (note: this is not the same as a credit check for a private student loan, which is much more stringent). The current interest rate for a grad PLUS loan is 5.30%.
To apply for a federal student loan, you first need to file the FAFSA.
The simplest way to file the FAFSA is online at studentaid.gov or through the MyFAFSA mobile app. To file the FAFSA electronically, you will need your FSA ID. If you don’t have one, you can register at studentaid.gov.
You may also choose to file a paper FAFSA, but this will take longer to process.
To apply for a parent PLUS loan, your child will first need to complete and submit the FAFSA. Once this is done, the parent can log into studentaid.gov with their own FAFSA ID and complete the PLUS loan application. Here you will indicate how much you would like to borrow and agree to a credit check to see if you have adverse credit as determined by the program.
Note: Before you borrow from the parent PLUS loan program, make sure to exhaust Direct subsidized and unsubsidized loan options first as these loans have lower interest rates and fees.
Once you have accepted your federal student loans, you may still have funding gaps. Or you may want to forgo PLUS loans for a more competitive interest rate and loan with no origination fees. This is where private student loans come in.
Private student loans exist to help students fill the funding gaps when federal student loans, scholarships, and grants come up short. There are several types of private student loans available depending on the borrower and situation. Unlike federal student loans, most private student loan lenders do not charge origination fees. Private lenders are also known to offer competitive interest rates. We always recommend that you limit the amount you borrow, but if you need some help covering those college costs, it’s worth it to do the research to find the best student loan options for you.
Loan Type | Borrower | Interest Rate | Loan Fee | Credit Check? |
---|---|---|---|---|
Direct Subsidized Loan | Undergraduate Students | Fixed 2.75% | 1.057% | No |
Direct Unsubsidized Loan | Undergraduate Students | Fixed 2.75% | 1.057% | No |
Parent PLUS Loan | Parents of Dependent Graduate Students | Fixed 5.30% | 4.228% | Yes |
Grad PLUS Loan | Graduate Students | Fixed 5.30% | 4.228% | Yes |
Private Student Loan | Undergraduate Students, Graduate Students, Parents | Fixed or Variable starting at 1.04% | Varies by lender, many lenders do not charge and origination fee | Yes |
When you think about private student loans, you think of the type of loans that are offered through banks, lenders, or credit unions, you may not think of loans offered through your school. When we talk about private student loans we really mean loans that fall outside the ‘federal’ classification. This includes institutional loans.
Some schools may have enough resources to offer their own campus-based loans. These can often be earmarked for groups of students that meet certain criteria, such as students’ regional backgrounds. In many cases, institutional loans may offer lower interest rates and more favorable terms than what is widely available from traditional lenders.
Not every school has the endowments or donors to offer institutional loans, but it certainly doesn’t hurt to ask if this might be an option for you.
Something else you may see from your school is a form of short term financing offered by your school through an outside lender. This may or may not be presented to you as a loan, however, it will have its own repayment terms and conditions. You especially want to read the fine print about what happens if you (voluntarily or involuntarily) withdraw from your program or are unable to make payments.
You can use student loans for education-related expenses. But that is a broad statement, so let’s get more specific. Student loans should be used to cover things like:
What you should not use your student loans for are non-essentials and things that do not relate to your education. For example, buying airline tickets for spring break, or buying a new car. Sometimes, there may be questions related to qualifying educational expenses. When in doubt, refer to your school’s cost of attendance breakdown or talk to your school. Depending on your major or degree, or certain circumstances, some less obvious costs may be considered as qualifying educational expenses.
When it comes to taking out student loans, here are some good tips to follow.
Another approach to paying for college is to reduce or eliminate your need to take out student loans. Here are some ways you can reduce your borrowing.
Attending a community college first can significantly decrease your cost of tuition, in some cases making student loans unnecessary.
Tuition payment plans are a great way to avoid loans. Many schools will allow you to make a series of payments at specified intervals to cover the cost of your tuition while attending. This can allow you to work and save to meet each payment, rather than borrowing money.
If you have a 529 College Savings Plan, use those funds before you borrow student loans.
If you are a student with demonstrated need, you may qualify for a work-study position. This is a job, typically at the school, where you can earn additional money to pay for college. Eligibility for work-study is determined by the FAFSA.
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