Many times, students need help paying for college. Of course, you can apply for grants, which do not have to be paid back. This is an excellent option and should be considered. Still, most people are going to need a student loan (or multiple ones) to cover all of the expenses relating to their higher education.
There are three different types of student loans, which include:
- Private Loans
- Federal Loans
- Refinance Loans (after you’ve finished school)
However, you should be aware that, within these three categories, there are multiple subcategories. We’re going to discuss each type of federal and private loan, as well as talk about how to refinance loans. That way, you are better prepared to choose the right one for your needs.
Federal Student Loans
Federal student loans often have eligibility requirements that must be met. Generally, they are need-based, which means you must show proof that you don’t have the funding to pay for your education any other way but through a loan.
These loan options can fill the gap for your education-related expenses, which grants, scholarships, and work-study opportunities don’t usually cover.
Remember, a federal student loan requires that you repay it with interest. Every federal student loan goes through the FDLP (Federal District Loan Program), which is owned by the DOE (Department of Education). Therefore, the federal government sets all the interest rates, conditions, and terms. Keep in mind, though, that interest rates are often much lower, and the terms are more favorable. Most students try to get federal student loans rather than private ones.
Right now, there are a variety of federal student loan types available. The ability to get one depends on its eligibility requirements and your need. To apply, you must fill out a FAFSA form, which can be done online or through the paper application.
Once you have exhausted all other forms of assistance that do not require being paid back, your next best bet is the Stafford loan. Generally, it comes with low interest rates, and you do not need a co-signer or an established credit history. You also get a deferred repayment period while you are in school.
These loans are referred to as FFEL (Federal Family Education Loans), and they’re designed to help supplement any grants, scholarships, and work-study programs. Of course, family resources also play a part. All of these things can help you meet the costs associated with room and board, fees, and tuition. Almost all students are eligible to receive a Stafford Loan.
You can find two types of the Stafford Loan, and both are secured through the federal government. Therefore, if you default on your loan, taxpayer money is used to repay the lender that provided you with the funds. Of course, that doesn’t mean you’re off the hook, as the federal government is then going to demand repayment from you, which can get a little messy and complicated.
Subsidized loans are only provided based on your financial need. You are going to fill out the FAFSA and list all of your financial resources. Government officials decide if you are eligible based on the information you provide. While you’re in school, you aren’t charged interest on the amount of the loan and during any deferment periods. Those things are paid for by the government, as long as you are still in school.
Unsubsidized loans are also available, but they aren’t based on need. Generally, anyone who applies for this type of loan is guaranteed to get some money. However, interest starts accruing immediately upon disbursement and is added to the loan balance when you graduate.
The loan money is actually disbursed to the school directly, so you don’t have to worry about making payments. The school gets two installments, often at the beginning of the semester. All of this money has to go for room and board, tuition and fees, and other school charges. If there is any money left over, you get it back by direct deposit or check. You may also request that the school hold the funds until the next semester or school year.
How Much Can You Borrow?
What you can borrow through the Stafford loan depends on what year you’re in and whether you qualify for unsubsidized or subsidized loans. Dependent undergraduate students can acquire:
- $5,500 is available for first-year students enrolled in a study program that’s a full academic year. $3,500 of that total can be subsidized loans.
- $6,500 is available for those who have finished their first study year and have at least a full academic year remaining. $4,500 of that can be subsidized loans.
- $7,500 is available for those who have finished two years of study with a full academic year remaining. $5,500 of that can be in subsidized loans.
Independent undergraduate students and dependent students with parents who couldn’t get a PLUS loan can borrow:
- $9,500 is available for first-year students enrolled in a study program that’s a full academic year. $3,500 of that can be in subsidized loans.
- $10,500 is available for students who have finished a full study year with at least one full year remaining. $4,500 of that can be for subsidized loans.
- $12,500 is available for those who have finished two years of study with a full academic year remaining. $5,500 of that can be for subsidized loans.
Graduate students can borrow $20,500 a year, but only $8,500 of that can be from subsidized loans. Once you’ve completed your professional or graduate degree, the maximum debts you can have from Stafford loans are just $138,500, which includes any loans you received for your undergraduate study. $65,500 can be from subsidized loans.
The GradPLUS loan is the graduate PLUS loan and is a federal student loan available to those students who are attending professional or graduate schools. They come with flexible loan limits and a fixed interest rate.
Eligibility for such a loan isn’t based on financial need. However, you still have to fill out the FAFSA to qualify for it. There is also a credit check involved.
GradPLUS loans allow you to borrow the amount you are going to need for the cost of attendance. However, other financial aid you receive is subtracted from the amount. These include federal student loans, fellowships, grants, scholarships, and private loans. Still, there is no cumulative loan limit.
Each year, the government fixes the interest rate. Right now, it is sitting at 7.08%. You can also defer your loan payments while you’re enrolled in school on a half-time or full-time basis. However, you must attend an accredited professional or graduate school.
Keep in mind that the GradPLUS loan requires you to have a good credit score. If you are delinquent of 90 or more days or have over $2,085 in debt, you could be turned down for this loan. Other issues can include wage garnishments, foreclosures, bankruptcies, repossessions, and more.
Sometimes, you may be required to have a co-signer, especially if your credit history looks a bit shaky. This person is legally obligated to repay your debt if you cannot do so.
Once the loan is disbursed, interest starts to accrue. You aren’t required to pay it as it builds, but it can be capitalized when you graduate, which increases the total amount of the loan.
Fees are required for GradPLUS loans, and right now, it sits at 4.236 percent. They are deducted from your loan disbursements.
How Much Can You Borrow
The limit of your loan is equal to the cost of attendance at your school, minus other financial aid you receive. Your cost of attendance includes things like:
- Room and board
- Tuition and fees
- Personal expenses
For example, if your cost of attendance at your school is $50,000 and you get other financial aid of $20,500, you can borrow $29,500 through the GradPLUS loan.
The money you get first goes toward tuition and fees. Anything left over goes to room and board (for those living on campus or in college-owned housing). Then, any other school charges are covered with your permission. What’s left can be refunded to you or held by the school for the next year’s expenses.
Standard repayment terms are ten years. However, you may choose to consolidate your loan or refinance it. Eligible repayment plans can include:
- IBR (Income-based repayments)
- PAYE (Pay-as-you-earn repayments)
- Standard repayments
- Graduated repayments
- Extended repayments
- Many others
This is much different than the traditional PLUS loan, which has fewer repayment options.
The PLUS loan is a loan taken out by your parents. Still, you must fill out the FAFSA form before your parent applies for a PLUS loan. To be eligible, your parent must be adoptive or biological (stepparent might also be appropriate), and you have to be an undergraduate, dependent student enrolled in an eligible school at least half-time.
Your parents cannot have any adverse credit history, though there are a few exceptions to the rule. You and your parents have to meet all general eligibility requirements to get federal student aid.
Grandparents are not eligible to get parent PLUS loans unless they legally adopted you. Even if they are your primary caregiver or guardian, it is the law.
Right now, the interest rate for such a loan is the same as all federal loans, which is 7.08%. This is fixed for the lifetime of the loan. Parents can borrow the cost of attendance for the school in which their child is attending. However, this is minus other financial assistance your child gets. The school determines the cost of attendance (COA).
In general, you start making payments on the loan once it has been disbursed. However, you may request a deferment, so you do not have to make payments if your child is enrolled at the school half-time or more. Also, you can defer payments another six months after your child leaves school, graduates, or drops out. To request a deferment, you should talk to your loan servicer.
Even if you are exempt from making payments on the PLUS loan, interest still accrues. You can choose to pay the interest or allow it to be capitalized (added to the overall amount of the loan) when you do start making payments.
Parents must go through a credit check before being approved for a PLUS loan. Even with a poor credit history, you might still be eligible for the loan. You can use an endorser (co-signer), or you can prove that there were extenuating circumstances as to why your credit history is bad.
It is possible to apply online, though check your child’s school to be sure. You also have to pay the loan fee, which is a percentage of your loan amount. It’s deducted automatically from the disbursement.
Repayment options are somewhat limited and include:
- Extended Repayments
- Graduated Repayments
- Standard Repayments
It is up to you to pay the loan off in a timely fashion.
Federal Student Loan Consolidation
Once you have finished school or drop below half-time status, you are usually required to start paying back the loan. You can defer payments for up to six months. If you have multiple loans, it is often a good idea to consolidate them. That way, you only have a single payment each month. Federal loan borrowers can consolidate through the Direct Consolidation Program, which is offered through the US Department of Education.
There are a variety of benefits to consolidation. For example, you may have lower monthly payments and one servicer with one repayment each month. Sometimes, you may also be allowed to switch to a fixed rate of interest from a variable one. There might also be more flexible options for payment, and there is no fee to consolidate.
Still, there are a few drawbacks of consolidating, of which you should be aware. For example, you’re going to make payments for a longer period. This means you’re going to pay more interest throughout the life of the loan. Also, you could lose some of the benefits of having a student loan through the federal government.
You’re also going to lose credit for the qualifying payments you’ve made toward the Public Service Loan Forgiveness program.
Consolidation is only available for certain loans. These include:
- Perkins (unavailable at this time)
- Federal Nursing Loans
- FFELP Subsidized/Unsubsidized loans
- (SLS) Supplement Loans for Students
- HEAL (Health Education Assistance Loans)
- Direct PLUS
- Direct Unsubsidized/Subsidized Loans
- FFELP PLUS Loans
You cannot consolidate private loans through the Direct Loan Consolidation Program. Also, if you have already combined federal student loans with your spouse, they aren’t eligible to be reconsolidated through the program.
It should also be noted that PLUS loans can only be consolidated back to the parent of the dependent student. You cannot combine them with the rest of your debt; your parent has to consolidate all of their PLUS loans and repay them.
Private Student Loans
If you have exhausted scholarships, federal loans, grants, and work-study options and still need help paying for college, a private student loan may be your next step.
Remember, it is best to use federal student loans first before you take out private loans because there are many differences regarding repayment options, features, and interest rates.
Private student loans are credit-based. This means your lender is going to review your credit history and score to see your creditworthiness. That’s your willingness and ability to pay before giving you the loan. It is easier to get turned down for one, but there are loans available for people with bad credit, too.
Your interest rates are also based on various things and can be much higher than federal student loans. Through federal loans, the interest is at a fixed rate. With private ones, it’s based on how much money you have borrowed in the past, how soon it was repaid (and if the payments were made on time), and what loan terms you chose.
Keep in mind that you do have options. Many private student loans are taken out by you personally (sometimes with a co-signer). However, some student loans can be given to parents or another creditworthy person, such as a relative or legal guardian.
There are also different payment options. You can sometimes choose to make payments while you’re in school. This helps to lower your overall loan cost and reduce your interest rate.
Before you apply for a private student loan, you should remember that you have to pay it back, even if you do not graduate from school. If you default on the loan, it is going to have a negative impact on your score and history.
How to Apply for Private Student Loans
While some people may be turned off by private student loans, it is a good option if you’ve exhausted other opportunities through the federal government. Still, it is important that you find the right terms.
This means you need to shop around. Learn about the various loan options available to find one that meets your needs. Consider going straight to your financial aid office at the college. It might have a ‘preferred lender list,’ which shows you the providers the school recommends.
Just remember that you still need to compare the lenders to find the best interest rates, lowest fees, and affordable repayment options.
Of course, most people don’t read the fine print. Taking out a loan is not the time to do that. Make sure you read all of the conditions and terms to help you compare different lenders and loan options. You can do this before you agree to the loan, which helps you with your comparison shopping.
It’s often a good idea to seek a loan from a variety of sources. Consider going to your credit union or bank first. These institutions already work with you, so they have a better idea of what you can afford and how you handle your money. You can also go to private lenders.
Here is the trick: Don’t borrow more money than what you need. It’s highly tempting to request extra to use for gasoline and other related expenses. However, this is how you get into significant debt. Also, some lenders approve the loan amount based on what the school says you still need to cover expenses. This is a good idea because it allows you to borrow enough for the cost of attendance. Payments are then more manageable once you’ve completed your education.
Even if you don’t have negative things on your credit history, it can be beneficial to use a co-signer. This can be especially helpful if you are a student who doesn’t have a steady income or an undergraduate without a credit history. Ask a parent or relative with high creditworthiness to cosign. You may have a better chance of getting approved and have lower interest rates, as well.
Types of Private Student Loans
Did you know that there are various types of loans available for students? You can ask for a general private student loan, but some are designed for specific industries.
For example, bar exam loans are available to cover expenses that the traditional loan doesn’t. These can include living expenses, prep classes, exam fees, and the like. If you’re currently studying to take the bar exam, this can be very beneficial.
Medical school loans are available for those who are taking courses relating to the healthcare/medical field. Plus, they could have lower interest rates than others. Still, they do not have forgiveness options if you end up working at a nonprofit hospital once you graduate.
Choosing the Best Student Loan for You
When it comes to paying for college, many students worry about what they’re going to do. The first step is always to fill out and submit the FAFSA form. You can talk to your school’s financial aid office for help on how to do that. It can seem like a complicated process, but it is essential.
You’re likely to get ‘free’ money through grants, scholarships, work-study programs, and more. This is money that is given to you and doesn’t have to be paid back. That’s never enough for the full cost of attendance, though.
Next in line is the federal student loans, which can be based on need or not. Parents can also take out loans for their children through the federal government.
Private student loans are the last option and should be used with caution. Understanding the types of student loans that are available can help you decide which options are best for your needs.