Student Loan Options

In October of 2012, over 66 percent of those students who graduated from high school that calendar year were enrolled in some institute of higher learning, such as a community college or a university, according to the United States Department of Labor. These students wanted to prepare themselves for their eventual careers, and they knew that obtaining a good education was the best way to help them achieve their goal.

These students will likely be rewarded for their ambition, as they’ll probably be qualified for jobs that would have been out of reach without an education. However, they might find that

education is costly.

In fact, in a 2013 study conducted by Citi and Seventeen, 61 percent of students admitted that college was more expensive than they’d anticipated. Sometimes, in fact, college is so expensive that students are forced to explore their college loan options.

Are Loans Required?

woman looking for alternatives to loansSome students come to school armed with scholarships and grants that can help them to pay for their schooling. These funding sources work like gifts, as they’re money students can use without worrying about repayment of any kind. As long as the student stays in school, and perhaps meets a few requirements regarding academic performance, the money will be in place for them to use.

There are a number of students, however, who don’t qualify for grants or scholarships. They may come from families that make just a little too much money, or they may not have an academic performance in high school that merits  a scholarship. These students may think that they can supplement their income with work and pay their bills, but they might be surprised at just how much college costs.

According to a report published by The College Board, tuition rates seem to rise each and every year. In California, for example, the cost of a public two-year education rose 104 percent in just five years. Students who find a job that can support their freshman studies may find that the same check doesn’t even begin to cover the cost of their senior year. Similarly, as students look for ways to cover their tuition, they’re also struggling to cover the costs of books, which NBC News suggests can top $1,200 per year. Working students might also find these fees hard to pay.

Working a job on the side can also make it hard for a student to:
  • Take night courses
  • Participate in study groups
  • Complete homework assignments
  • Prepare for exams

All of these small problems could mean that a working student spends more time in school, and that could be more expensive than simply focusing on education while leaving the world of work behind.

If families can’t foot the bill, and scholarships and grants can’t cover the cost involved, there are a number of student loan options for college that might be important.

Federal Options

When people think of student loan options, they may immediately think of banks and credit unions, and reams of private paperwork. While it’s true that private banks offer student loans, and their role will be discussed a little later in this article, many student loans come directly from the federal government. When they do, they’re known as federal loans.

Common Federal Loans
There are a large number of federal student loans, and they all are designed to serve a different type of student. Common federal loans include:

  • Direct Unsubsidized Loans: These loans are available to all half- or full-time students at the graduate and undergraduate level, regardless of financial need.
  • Direct Subsidized Loans: These loans are only available to undergraduate students, and students must demonstrate financial need in order to qualify. This restriction is in place because the government pays interest on the loan for a specific period of time on behalf of the student.
  • Direct PLUS Loans: Loans like this are designed to allow parents to take out money to help their children attend school. Adults in graduate school may also participate in these loan programs.

The eligibility requirements and limitations are listed on the website of the U.S. Department of Education, and while the site is quite clear, all of the restrictions can be confusing. Some loans have a certain interest rate, while others are more expensive. Some are capped at a certain low borrowing level, while others have a much higher borrowing limit. Students who want to use the federal student loan options may be a little confused about what they can and cannot obtain.

Thankfully, students don’t need to know a significant amount in order to get the process started. They will need to fill out the Free Application for Federal Student Aid (FAFSA), available either online or through their school’s financial aid office, and they’ll then wait for the application to be processed. Often, once the application has been processed, students will be provided with a letter that simply tells them what they qualify for, and they can work with the Financial Aid Office to complete the paperwork.

Many students enrolled in higher education choose the federal marketplace when it’s time for them to explore their student loan options. In 2013 alone, according to the U.S. Department of Education, some 9.3 million new subsidized loans were generated, with millions more taking out PLUS and unsubsidized loans. The Federal financial aid program should be a student’s first resource when looking for low-interest rate student loans for college.

Private Choices

private aid optionsWhile many students choose to use federal loans, they’re not the only option available to students. Those who want to explore their college loan options comprehensively, without limiting their choices to federal programs, may find that they have a wide range of products to choose from in the private marketplace.

Private lenders, like banks and credit unions, can provide loans to students so they can fund their educations, but these loans are sometimes considered a little bit risky. The loans are often unsecured, meaning that they’re not attached to a specific asset that can be confiscated, like a car or a house, and some students who apply for these loans have little to no credit history, which makes lenders less likely to approve them for a loan, especially after the financial crisis and credit crunch of 2008-2009. As a result, these loans can sometimes come with strings, like high fees, and some students find those costs unappealing.

However, students with good credit histories, or family members who have good credit and a willingness to co-sign, can find excellent private student loans that have favorable terms. Listing all of the options available is impossible, as each bank has its own product line to share, and each loan might be customized based on student need and credit scores, but it’s safe to say that at least some students find the loans they want in the private marketplace, as a report produced by the Consumer Financial Protection Bureau suggests that the market contained about $6 billion in 2011.

Federal or Private?

Student loan options for college are vast, and it can be hard for students to determine whether federal loans or private loans are right for them. In the end, it’s an intensely personal decision that depends heavily on the financial picture of the student, and that student’s personal preference regarding the funding for the educational experience. For some students, it’s just the first in many financial decisions they’ll make over the course of a lifetime.

For some, the benefits of federal loans are so big that they simply can’t be ignored. It’s a good point, as many of these loans aren’t tied to a student’s credit report or financial health. In fact, all students who apply for federal student loans—and meet the borrowing criteria—are eligible, at the very least, for Unsubsidized Direct Loans. They can be combined, for example, and the debt can sometimes be discharged with specific types of work in specific places, like if you work as a public school teacher or in other social services. The loan payments can also be deferred, if students meet specific need requirements. These sorts of things are sometimes rare to find in private sector loans, but they are available in federal loans.

Low interest rates have commonly been touted as a benefit of federal loans, and while it’s true that some years have seen federal loan rates dip far below the rates seen in the private sector, this may not always be the case and it might not be true for all students. Some private loans really do have good interest rates, and some allow students to lock in those low rates, so they might save a bundle on interest. Be sure to carefully compare your loan options, though, before taking out a loan, whether it’s federal or private.

Private loans are also, as the name implies, private. They can help fill the gap after all other forms of aid, such as grants, scholarships, and federal loans have been exhausted. The financial aid office certifies the loan amount to be borrowed. The amount is determined by the cost of attendance minus any other aid. The loan money is sent to the student’s school and applied directly to the student’s account. Depending on a student’s or co-signer’s credit history, the interest rates may be more attractive than federal loans. Each circumstance is different and each student and family should determine what loan is right for them.

Making It Work

Lower your monthly payment by refinancing

There’s been a significant amount of press coverage about the number of students who default on their student loans, whether they come from banks or the government. An article in USA Today, for example, suggests more students will default on their loans than students who will graduate from school on time. It’s a disturbing trend, and it’s certainly something students should be mindful of, but worries about defaults shouldn’t keep students away from school. Instead, as they compare their student loan options, they should be mindful of the future and make good choices.

In general, it’s best for students to borrow the funds they need, and not a single dollar more. Each dollar they take from a loan must be paid back, so it makes sense for students to look for ways to cut the size of the loan they’ll use. Living frugally and making smart school choices can allow students to reduce their educational bill and the amount of money they’ll need in a loan.

Students should also look over all their college loan options with care, comparing one plan to another in terms of overall cost and benefit. Reading through all of the fine print regarding fees and penalties can also help students to spot a loan that might not be just right for their particular situation at that time. This kind of research can seem boring and dry, but it’s the best way to ensure that students understand their college loan options, and make the right choices when it comes to funding.

Find a Loan

As mentioned, federal loans begin with a FAFSA, and as a result, most students should begin their student loan options research by filling out this form. When the results come back, they’ll know if federal loans are even open to them, and if so, they’ll know which loans to use in their comparisons.