Your Guide to Choosing Student Loans
Of the nearly 20 million people that attend college in the United States, about 60 percent borrow money to help pay the tab, according to the Chronicle of Higher Education. Since more than half of all students are borrowing money, you might think that most students understand the wide variety of options there are for financing a college education, and that students would know what to expect when repayment eventually comes around. However, a remarkable number of students remain confused about their options and the procedures they should follow to get the most out of their money. This article should help explain the financial aid landscape and a student’s financing options.
Private — Loans that originate with banks and credit unions
Federal — Loans that originate with the U.S. Department of Education
Fixed-Rate — The amount of interest charged doesn’t change over the life of the loan
Variable-Rate — Interest rates are tied to the market and can fluctuate over time
Choosing between Federal and Private Loans
Federal loans should be a student’s first choice when considering their borrowing options for college. However, federal loans may not cover a student’s full financial need, which is where private loans can come into play.
- are not U.S. citizens
- are in default on a federal student loan
- don’t maintain satisfactory academic progress in college
- are convicted of a drug offense
If federal aid does not cover a student’s full financial need, or if a student is ineligible to receive federal aid, private loans can be a good funding option. While having a credit worthy cosigner can help almost anyone get a private loan, research from The Project on Student Debt suggests that private loan rates tend to vary depending on the schools students attend.
Understanding the Difference
Private loans offer a variety of interest rates, fees and other borrower terms. They typically have higher borrowing limits than federal loans. Some are variable-rate loans linked to market conditions, while other are fixed-rate. Some lenders require students to make payments while they are enrolled, while many others allow students to defer payments, or offer a grace period where payment is not required, until after graduation. Often students are the primary borrower of these loans and generally will need a creditworthy cosigner, such as a relative or friend, to ensure they are approved for a private loan. Researching private loan options helps students to find the most competitive option available.
- Federal loans are typically fixed and have low interest rates. Occasionally, these loans are subsidized, meaning the federal government pays the interest on the loans while students are enrolled or even for several months after graduation. In order to receive federal loans, applicants for aid must complete the FAFSA (Free Application for Federal Student Aid).
- Stafford Loans are the most common federal loans. Undergraduate students may qualify for some or all of their Stafford Loans to be subsidized depending on their financial need and their continued academic progress, while both undergrads and graduate students are eligible for unsubsidized Stafford Loans without demonstrating financial need. The amount of Stafford Loan funds students can borrow varies based on year in school and the aggregate amount of federal loans funds already borrowed.
- For students who demonstrate exceptional financial need, Perkins Loans can provide a subsidized, low-interest solution to covering college costs. Perkins Loans are extremely limited, though—they make up roughly just 2% of all disbursed federal aid.
- Parent PLUS Loans allow parents of undergraduate students to borrow federal loan funds at a fixed interest rate. These loans also have relatively high borrowing limits.
- Students enrolled in graduate or professional program students can borrow a fixed interest rate loan called a GradPLUS Loan. Typically, graduate students maximize Stafford Loans before borrowing GradPLUS Loans. Similar to Parent PLUS Loans, GradPLUS loans have high borrowing limits.
Earnings Potential Based on Completed Level of Education
Understanding the Obligation
There’s no question that loans can be helpful, but students who take on these loans must understand that they’re entering into a legal contract, and refusal to adhere to the loan terms can have some serious consequences. Unfortunately, many students don’t seem to understand that point.
Two out of five students who borrow for their education go into delinquent status within the first five years of the repayment period, according to the Institute for Higher Education Policy.
A study from Demos and Young Invincibles provides a variety of reasons that young people cite when they default on their student loans, such as unemployment, debt, tight budgets, and general financial uncertainty, among others.
Students who take out loans for school don’t have to go into default. By following a few basic guidelines, borrowers can manage their repayment process smoothly, stay out of default, and build a strong credit history. These are some good rules to live by as you repay your student debt:
- Review all loan documents carefully, and call the lender directly if any terms seem confusing.
- Make payments on time, every time, to avoid late fees, additional interest, collection fees, and a variety of other costs associated with the collection process.
- Call the lender at the first sign of trouble, and ask about deferment options available.
- Use any extra money, such as bonuses and gifts, to make added loan payments.
- Ask for credit counseling if the debt still seems too difficult to handle.
If paying back a student loan seems like a huge burden, there are some steps students can take to reduce the amount they must borrow, such as working part-time while in school, applying for scholarships, attending a more affordable schools, and exploring loan forgiveness options for federal loans.
Types of Student Loans
Student Loans by State
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