Unless your parents have saved up enough money or if you earn a huge pay check, your only option for studying in college is obtaining a student loan. Gone are the days when students could work their way through college. Besides, there are not many students who can earn enough money to pay for college while also studying. It is due to this reason that most students simply take up a student loan or student loan debt. However, it is important to learn as much as possible about students loans and this guide will provide you with all the information you need. There is no denying that student loans provide you with the funds needed to study in college. But, if you are not careful and do not take up the right option, you might find yourself being stuck with student loan debt for a long time. It is always better to be safe than sorry.
What Do Student Loans Cover?
The first thing that you need to know is what student loans cover. Student Loans are not designed for things that are not essential to your college experience. It means that student loans will only cover your cost of attendance which includes school tuition, administrative fees, room, board, supplies, and books. On the other hand, private loans might be able to help you cover different types of expenses that you might struggle to pay for as a student due to your coursework such as parking fees, internet services, computer supplies, and the list goes on.
Understand Your Obligation
The reason why you are considering taking up a student loan in the first place is because you know that loans are helpful. But, as someone who takes up a loan, you need to understand that you have to sign a legal contract with the lender. Thus, you must adhere to the loan terms as a failure to do so would result in serious consequences. Unfortunately, most students either do not understand this point or take it too lightly.
According to research conducted by the Institute for Higher Education Policy, as much as 40% of the students that borrow for their college education end up going into delinquent status within just the first five years of their repayment period. Demos and Young Invincible did a study which suggested different reasons why young people default on student loans such as tight budgets, debt, unemployment, general financial uncertainty, and the like.
How You Can Get a Student Loan?
Now that you know what student loans cover and your obligation, we can look at how you can get a student loan. When it comes to getting a student loan, you have plenty of options to choose from. Keep in mind that not every option available is the same. The student loan you select would impact how much interest you pay, your repayment terms, and much more. Since applying for a student loan is a huge step in your life, it is vital that you choose the right loan to ensure a stable path. The following steps will prove useful.
Step 1: Complete the FAFSA (Free Application for Federal Student Aid)
The first thing that you need to do if you are interested in getting a student loan is to complete the government’s FAFSA (Free Application for Federal Student Aid) form. A series of questions are asked by the FAFSA about your income and investments as well as those of your parents. You need to provide all the relevant information to help calculate your EFC (Expected Family Contribution).
Questions that you should expect regarding relevant matters include if your parents have another child who is also studying at college at the same time. The EFC is the amount of money that the government thinks you would have no trouble paying for college out of your own resources.
Head over to the Student Financial Aid website to complete your FAFSA online. Simply round up all the account information to save time rather than having to determine each and every detail. One thing you should always remember is the fact that the FAFSA not only needs to be complete when you first apply for aid but you have to complete it for every year you plan on receiving aid.
Step 2: Go Through Your Financial Aid Options
The information you provide from the FAFSA will be used by the financial aid office of the colleges that you want to study in. It will help them determine how much aid you can receive. The college would compute the amount of aid to provide you by subtracting the EFC from the cost of attendance. As mentioned above, cost of attendance includes school tuition, admin fees, room, board, and other expenses such as books and supplies. You can easily find this information on every college’s website.
To bridge the gap between the COA and EFC, an aid package will be put together by the college. It would include paid work-study opportunities and federal Pell Grants, and loans. A great thing about grants is that they do not need to be repaid unlike loans, except in certain situations. Grants are offered to students that the government finds in need of exceptional financial assistance.
You will be notified for the amount of aid the college can offer you by the time you receive the official acceptance. It is often known as the award letter. Besides just federal aid, it is possible for the college to offer you money out of its own funds such as in the form of an athletic or merit scholarship. Award letters tend to be different depending on the college you apply for. This is why it is important to carefully compare them. When looking at the loans, you need to find out if they are subsidized or unsubsidized. The differences between the two are mentioned below.
Direct Subsidized Loans
Similar to grants, direct subsidized loans are offered to students who face exceptional financial circumstance. The reason why direct subsidized loans are a great option is because they are offered by the U.S. Department of Education. It means that your interest would be covered for up to six months post-graduation and while you are at least a half-time student.
Direct Unsubsidized Loans
Direct unsubsidized loans are offered to families regardless of their need. Their interest starts to accrue immediately.
When you qualify for a program, the college might even offer you both types of loans.
There are many advantages of federal loans over private student loans. Whether you receive a private loan from a bank or other private lender, you would not enjoy the benefits offered by federal loans. Some of the benefits of federal loans include low, fixed interest rates and greater flexibility when it comes to repayment. But, the amount of money that you would be able to borrow will be limited. For instance, the majority of first-year undergraduate students are only allowed to borrow about $5,500 and not more than $3,500 of the amount can be in the form subsidized loans. There is even a limit on how much money can be borrowed in total.
If you are looking to borrow more, a popular option that you might be interested in is a federal direct PLUS loan. These loans help parents of undergraduate students, graduate students, and also professional students. The reason why PLUS loans are popular is because they tend to have a much higher limit. They are available to students regardless of their need. But, parent borrowers need to pass credit checks to determine their credibility. When considering student loans, both undergraduate and professional students should consider seeking federal loans. But, federal loans might not fully cover your financial need and you might need to take up a private loan as well. Not every student is eligible for federal loans. To qualify for a federal loan, you must meet the following requirements.
- Be a US Citizen
- Must not have defaulted on a federal student loan
- Need to maintain satisfactory academic progress throughout college
- Must not be convicted of a drug offense
Key Takeaways of Federal Loans
- They tend to be fixed and offer lower interest rates as compared to private loans. It is possible to receive a subsidized loan. If you receive such a loan, the federal government would help pay the interest while you continue to study in college and even for a few months after you have graduated. To qualify for a federal loan, you must first complete the FAFSA.
- The most common type of federal loans is direct loans. Undergraduates might qualify for all or some of their Direct Loans as a subsidized loan depending on their financial circumstances and academic progress. On the other hand, both undergrad and grad students can be eligible for receiving unsubsidized Direct Loans without having to prove a financial need. The amount of money that students can borrow through a Direct Loan depends on the aggregate of federal loans borrowed and their school year.
- Perkin Loans are another popular option. These are offered to students that are able to demonstrate substantial financial need. The loan provides a low-interest, subsidized solution to students. However, they are very limited.
- Parent PLUS Loans help parents of undergraduates to take up a federal loan at a fixed interest rate. The reason why they are popular is because they have a high borrowing limit.
- Grad PLUS Loans are a great option for graduate students. They have a high borrowing limit.
Step 3: Look At Private Student Loan Options
If you need more money than what is offered by federal student loans, you should consider applying for a private loan. You can borrow a private loan from a credit union, a bank, or any other financial institution.
Private loans are offered to students regardless of need. Instead of having to fill FAFSA, students can apply for a private loan using the lender’s own forms. You do need a good credit rating or have someone co-sign the loan such as a parent or relative to get a private loan.
One of the most important things that you should know about private loans is that they carry a much higher interest rate as compared to federal loans. Moreover, their rate tends to be variable. This only adds uncertainty to how much you would end up owing. Unlike federal loans that offer flexible repayment plans, private lack such flexibility. Besides this, you would be ineligible for federal loan consolidation. However, you have the option to refinance the private loan once you have graduated and can get a much lower interest rate.
Furthermore, private loans offer different borrower terms. But, you would benefit from a much higher borrowing limit as offered by federal loans. Some private loans would require students to pay while enrolled, whereas, others let students defer payments until they graduate. When it comes to student loans, students tend to be the primary borrower and would require a co-signer who is credit-worthy such as a friend or relative to get their loan approved. To get the most competitive loan, it is best to do plenty of research.
Step 4: Select Your School
The amount of money you need to borrow for attending a college versus another might not be that important to you. However, you should definitely consider it. Finishing school and graduating with a ton of debt is not a good idea. It is even worse to take up debt and not graduate as it would make the loan a burden. When considering which student loan to pick, you need also consider the future career you intend on pursuing. If you study at a school for a highly-paid entry-level job, you would be in a much better position to get your loans repaid. It is the only reason why you should even consider taking up more debt.
Now that you have gone over this guide, you will have a better idea about which student loan to consider. Make sure to read the guide a few times to fully understand what options are available to you.