The best way to pay for college and to cover all your educational costs is to create a financial plan that includes strategies to help minimize student loan debt. Begin by researching and applying for any grants or scholarships you may qualify for. This can be a great way to reduce college costs, as this money does not need to be repaid. There are also work-study programs that can provide part-time income throughout the school year to help pay for school.
If you still need financial assistance after exhausting all grant and scholarship options, there are loans available from the government. Federal student loans are recommended as the first choice for borrowers due to their more flexible repayment options and other benefits. However, private student loans may offer better interest rates for some qualified borrowers. It's important for prospective borrowers to compare their options carefully before signing any contracts.
When considering your loan options, many students and parents wonder why they have to borrow a student loan. If they find a personal loan with better terms, or they’ve hit their student loan limits, wouldn’t this be an “okay” choice? While borrowing money is ultimately the choice of the borrower, it’s important to understand how each type of debt works before you make that decision.
Types of Student Loans
Let’s go over the types of student’s loan available. There are federal and private student loan options available to help you cover the costs of college.
Federal Student Loans
Federal student loans are financial aid options offered by the federal government to help make college more affordable for students and their families. There are a variety of different types of federal student loans available, including Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
Direct Subsidized Loans are need-based loans that are only available to undergraduate students with financial need. The federal government pays the interest on these loans while the student is enrolled in school at least half-time, during grace periods, and during deferment periods.
Direct Unsubsidized Loans are non-need based loans that can be taken out by both undergraduate and graduate students. Unlike subsidized loans, borrowers will be responsible for all interest payments on unsubsidized loans even when they’re in school or during deferment periods.
Direct PLUS Loans are also known as Grad PLUS loans for graduate students or Parent PLUS loans for parents of dependent undergraduate students to borrow money for their child’s education expenses. They do not have an aggregate loan limit like other federal student loan programs and require a credit check from the borrower before being approved.
The repayment options for federal student loans vary depending on which type you have taken out as well as your overall financial situation. Federal student loans offer flexible repayment plans such as income-driven repayment plans or extended repayment plans that reduce monthly payments or provide more time before full repayment is expected (up to 25 years). Depending on your career choice, you may even qualify for forgiveness programs such as Public Service Loan Forgiveness or Teacher Loan Forgiveness if you meet certain requirements.
Private Student Loans
Private student loans are typically offered by banks and other private lenders to help students finance their college education when all other types of aid fall short. Many private student loan providers also offer interest rate discounts for those who have a good credit history or who make automatic payments.
The types of private student loans offered can vary from lender to lender, but generally include fixed-term and variable rate loans. Fixed-term loans typically have a set repayment term and interest rate that does not change during the life of the loan, while variable rate loans can have an adjustable interest rate that may be lower initially but could increase over time. Private student loan repayment terms also range from five to 20 years, depending on the amount borrowed and the repayment plan chosen.
Private lenders will also typically allow you to defer payments while attending school at least half-time or more. Interest will still accrue on the loan during this time but this allows you to focus on your education without worrying about payments. You may also have the option with some lenders of making interest-only payments so that your loan balance doesn’t increase while in school.
To qualify for a private student loan for college you will need a strong credit score. Your credit score is an indicator of how likely you are to repay any money borrowed from lenders. Those with higher credit scores will have access to lower interest rates on their loans while those with lower scores will face higher rates or even denial of their applications. It's important to remember that a good credit history is essential when seeking any kind of loan.
Personal Loans
Lenders will not typically lend you money for education with a personal loan due to federal law. If they know the purpose of the loan is for educational purposes, they will most likely offer you a student loan or refer to a lender that can offer you a student loan. That said, you can borrow a personal loan for living expenses but that is also not a wise choice as student loans can cover all educational related expenses, including living expenses such as housing, food and transportation while you are enrolled in college at least half-time or more.
If you’ve exhausted all options for paying for school such as scholarships, grants, work-study programs and even your savings and must borrow money for college, seek out federal student loans first. If after federal aid you still need more money there are private student loans, but it’s not advised to borrow a personal loan to pay for college.
Financial Aid Options
Filling out the Free Application for Federal Student Aid (FAFSA®) is a critical first step when looking for financial aid. The FAFSA is an online form that collects information about your income, assets, and other financial information to determine the kind of aid you may be eligible for. Depending on your situation, you may qualify for grants, loans, or work-study programs from both the federal government and your state government.
In order to complete the FAFSA, you need to provide basic personal information like your social security number, address and details about your education level. You will also need to provide financial information about yourself and your family if you are a dependent student. Your parent or guardian must provide their information if you are considered a dependent student for FAFSA purposes.
Once all of this information has been processed by the US Department of Education, they will send you an expected family contribution report that shows how much money they expect your family can contribute towards your college costs. This number will then be used to determine what kind of financial aid packages are available to you. It usually takes three weeks or less for this report to arrive after submitting the FAFSA online.
It’s important to fill out the FAFSA as soon as possible each year because some funds, specifically state and school, are given on a first-come basis and can run out quickly. There are some states that have strict deadlines that must be met in order to be eligible for certain types of aid such as grants or scholarships with specific requirements like GPA or other criteria. Failing to submit a completed application by these deadlines could mean missing out on valuable funding opportunities that could help pay for college.