Student Loan Guide
Student loans allow students to borrow money to pay for their college expenses. These loans can be applied to tuition, room and board, books, and other living expenses while going to college or graduate school. A large portion of the student loan market is sponsored by the United States government. This allows for these loans to have generally low interest rates and flexible terms. Student loans are provided based on the understanding that students will need time after completing school to pay them back.
How Student Loans Work
Student loans can be obtained from both private and federal lenders. Depending on the borrower you choose, the process might be slightly different, however, in general, federal and private student loans operate similarly. When you are granted a student loan, your loan is initially disbursed to your school. After your tuition and fees are covered, the remaining money is given to you to pay for additional costs such as housing or books. These surplus funds can also be returned to your lender if they are not needed.
If borrowing from the government, you will need to reapply for financial aid every year. However, private lenders may develop their own terms which could require you to reapply for a loan every semester. Some lenders may also require minimum grades as well as enrolling in a set number of credit hours.
Student Loan Interest Rates
Interest rates, or annual percentage rates (APR), need to be taken into account to determine the full cost of your student loan over time. Interest rates for student loans are dependant on who you borrow the money from.
For federal student loans, interest rates are set by the United States Congress. Federal student loans come at fixed interest rates, meaning they will not fluctuate over time. On the other hand, private lenders will often offer you a student loan with variable interest rates. Variable interest rate loans may seem appealing, as they begin with very low interest rates, however as interest rates increase towards the end of your loan, they may end up costing more overall. Private lenders will examine your credit score to determine the interest rate on your loan.
Lastly, in many cases, interest will be deferred until after you graduate. This means that your loan will begin accruing interest once you have graduated and are required to start paying back your loan. This may not be the case with all private lenders. Some charge interest starting at the time of disbursement of funds. You should carefully review the terms of the loan when shopping around with private lenders.
Types of Student Loans
Before taking out a student loan, you need to understand what your options are.
Federal Student Loans
The United States Government offers several student loan programs. The William D. Ford Federal Direct Loan Program currently offers three different loans to choose from: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. Direct Consolidation Loans allow borrowers to utilize several types of federal student loans.
The basic eligibility requirements for all three types of federal student loans are the same. Some of these include being enrolled at least half-time or being accepted into a qualifying degree program. Individuals applying for a federal student loan will have to go through the Free Application for Federal Student Aid (FAFSA).
While the different types of federal student loans share several similarities, they are not the same. These loans may have different interest rates, annual loan limits, disbursement fees, and other factors. Your terms may also be affected by your status as a student, such as being an undergrad, graduate student, parent of a student, etc.
Direct Subsidized Loan
Direct Subsidized Loans are only available under certain circumstances. First, you have to be an undergraduate. Also, your school has to determine your eligibility based on tuition costs and the expected contribution from your family. Your loan limit may increase as you progress through school. However, if your financial needs decrease, then so could your loan limit. With Direct Subsidized Loans, the government will pay the interest that accrues on your loan while you are enrolled at least half-time.
Due to low interest rates, low disbursement fees, and subsidization, Direct Subsidized Loans are typically the best option for students in need of financial assistance. However, depending on your financial circumstances, you may not qualify for enough money to pay for all of your expenses.
Direct Unsubsidized Loan
Unsubsidized loans are available to both undergraduate and graduate students. They do not require you to demonstrate financial need. Unsubsidized loans also generally have larger loan limits than subsidized loans. Your limit will be affected by factors such as your dependency status and field of study. Other factors that affect the amount you can borrow include your tuition costs, how much financial aid you’ve received from other sources, and your family’s ability to contribute to your education.
For undergraduate students, these unsubsidized loans have the same interest rates and fees as subsidized loans. However, since there is no subsidy, you will likely end up with a lot more debt. For graduate students, you may be better off pursuing a private student loan if you have a decent credit score. Direct Unsubsidized Loans are not always the best option, but they can be a great alternative for students who do not qualify for a Direct Subsidized Loan.
Parent PLUS Loan
Parent PLUS Loans are one of two types of Direct PLUS Loans. These can be borrowed by parents to help pay for their dependents’ education. In addition to the basic requirements set for students, parents must also undergo a background check when applying for a Parent PLUS Loan. However, even if they don’t pass the credit check, parents may still qualify for a loan through the use of a cosigner.
For Parent PLUS Loans, parents must request a deferment. Otherwise, payments start immediately after the loan is disbursed. Deferment will generally work the same as for student borrowers. This means payments are suspended as long as the student is enrolled at least half-time. However, interest will still accrue during this period.
Keep in mind that Direct PLUS Loans have the highest interest rates and disbursement fees out of all the different federal student loans. However, if it is between this and a private student loan, you may find a Direct PLUS Loan to be the better option. Additionally, Parent PLUS Loans cannot be transferred to the student, but can potentially be refinanced through a private lender.
Grad PLUS Loan
Grad PLUS Loans can be taken out by graduate and professional students to help cover educational expenses. These loans are subject to the same fees, limits, and credit checks as Parent PLUS Loans. Grad PLUS Loans are automatically deferred until six months after you stop being enrolled half-time at your school. Additionally, these loans are eligible for all of the income-driven repayment plans.
Grad PLUS Loans do not have pre-set loan limits, meaning you can borrow enough to cover the cost of attendance at your school, however, higher interest rates on Grad PLUS Loans might make a private loan or a Direct Unsubsidized Loan a better option for you.
Private Student Loans
Private student loans are simply those that you borrow from a non-government provider. These loans must still be used for educational expenses and are still subject to some federal laws. As an example, private lenders cannot charge any fees for paying off your loan early.
Interest Rate Discounts: Signing up for autopay grants you a 0.25% interest rate discount for federal and private student loans.
No Funding Fees: Private lenders don’t typically charge origination or disbursement fees.
Large Loan Limits: Many federal loans have pre-set loan limits. On the other hand, private lenders will often let you borrow up to your school’s cost of attendance.
Potentially Low Interest Rates: Students with good credit may be able to get lower interest rates from a private lender.
Variable-Rates: Variable-rate loans generally start with lower interest rates than fixed-rate loans. Be careful, though, as interest rates are generally trending up right now.
No Federal Benefits or Programs: Private student loans don’t offer benefits such as federal repayment plans or subsidies.
Few Hardship Options: Private lenders often don’t offer deferment options or other plans to help students who have trouble making payments.
Credit Requirements: Private lenders perform thorough credit checks to determine the loan that they are willing to offer you. Many federal loan programs do not do this.
Discharge Policies: Federal loans allow borrowers who become disabled or die to discharge their loans. Private lenders do not always offer this, which would leave your estate or cosigner with your remaining balance. In addition, most student loans cannot be discharged through bankruptcy. You can only do so by showing significant financial hardship for yourself and your dependents. More information is available from the SBLA.
Defaults: Private student loans generally default quicker than federal student loans. When you default on your loan, you immediately owe the entire balance. Federal student loans also typically provide ways to get your loan out of default whereas private lenders do not.
Loan Repayment Assistance Programs: Many loan repayment assistance programs won’t assist you in repaying a private student loan.
Where to Get Private Student Loans
Private student loans can be obtained from a variety of sources, including banks, credit unions, states, schools, and online lenders. You can find reputable lenders through recommendations from friends or by consulting with your school.
When searching for a private lender, be sure to compare multiple offers to determine the lender with the best terms for you. You should compare interest rates, fees, restrictions, and discounts to be sure that you get the best offer available.
Should You Get a Private Student Loan?
For most students, federal loans are the best option available. However, in some circumstances, a private loan might be preferable or necessary. For example, if your federal loans aren’t enough to cover your full cost of attendance, you may need to take out a private loan to cover the rest of your expenses. Or, if you or your parents have an exceptional credit history, private loans may offer more favorable interest rates than federal loans. Before taking out a private loan, you should consider the benefits and drawbacks of doing so compared to borrowing a federal student loan.
How Much Can You Afford to Take Out?
How much you can afford to borrow is highly dependent on the interest rate of your loan. While private loan interest rates widely vary, federal student loan interest rates are set by the U.S. Congress every year. Once your loan has been disbursed, your interest rate cannot be changed unless you refinance your loan.
For July 1, 2018, to June 30, 2019, the federal student loan interest rates are as follows:
Direct PLUS Loan: 7.60%
Direct Subsidized Loan: 5.05%
Direct Unsubsidized Loan for Undergraduates: 5.05%
Direct Unsubsidized Loan for Graduates: 6.60%
Most loans defer repayment until after you’ve completed college, plus a grace period. This gives you time to establish a job and begin your career. Know that you will need to begin repayment of your loans if you fall below the minimum credit hours or leave school. However, there are some options available for loan forgiveness or cancellation. These include becoming a teacher or completing public service. You can find a full list of these options available at the government student aid website here.
How to Get a Student Loan
The process for applying for a student loan depends on whether it is a federal or private loan.
Apply for a Federal Student Loan
To obtain a federal student loan, you must submit a Free Application for Federal Student Aid (FAFSA) every year. You should fill out your FAFSA as early as possible, as some states and institutions grant financial aid on a first-come, first-served basis. Filling out your FAFSA may also be a requirement before applying for other forms of financial aid.
Go to fsaid.ed.gov and create your FSA ID to begin your application. In some cases, your parent or other cosigner might also need to create an FSA ID. After you’ve created your account, go to fafsa.gov to start your application. You will need:
Financial forms such as W-2s and income tax returns
Your social security number
Your parents’ social security number and income-related forms, if you are a dependent
Typically, it takes less than an hour to finish filling out your FAFSA. If you are a first-year student, you can send your application to the schools that you are considering attending. Existing students will send their application to their current school.
You will receive a Student Aid Report (SAR) after submitting your FAFSA. This report details your FAFSA information and your family’s expected contribution. Ensure this information is correct as this is what schools and states use to determine your financial aid eligibility.
Next, your school, or schools, will send you offers for financial aid packages. This could include loans, grants, scholarships, work-study funds, or other types of financial aid. You should pick the package that best suits your needs. Remember that you do not have to accept the full amount that is offered.
Apply for a Private Student Loan
Private lenders will have their own unique application processes. You will not need to fill out your FAFSA to take out a private student loan. However, you will likely need to have much of the same information available to fill out your private loan application. Additionally, you will need to have the information of your cosigner, if you are using one.
If your application is approved, you may be given multiple offers to choose from. In this case, be sure to consider the long-term cost of each offer. Don’t immediately choose the one with the lowest initial interest rate.
Best Student Loan Lenders
As stated throughout this article, federal student loans are, more often than not, the best option available. However, in some cases, you may be able to obtain a loan with more favorable terms from a private lender. Unfortunately, there is no single best lender out there. It all depends on your financial circumstances, credit history, and educational expenses.
You can check out your local bank or do some online searches for private lenders. However, remember that these companies might not necessarily be your best option. Always make sure to compare your personalized offers to find the best deal available.
Tips to Find the Right Student Loan for You
Make Sure to Get Pre-Approved
This tip applies mostly to students looking for a private lender. Remember, private student loans do not have set interest rates like federal student loans. As such, it is important that you are able to get all the information possible in order to compare different lenders.
Pre-approval generally requires you to submit fairly basic identifying and financial information. In some cases, you may also be subject to a soft credit check. Using this information, private lenders may be able to provide you with more information on what interest rates, fees, and other loan terms you might be eligible for.
With student loans, it is important that you carefully compare offers between potential private lenders as well as between your federal student loan options.
Interest rates, in particular, can drastically increase the long-term cost of your loan. As a result, it is important that you compare your variable-rate offers with the fixed-rate loans provided by federal programs.
Consider All of Your Expenses
Educational expenses go far beyond tuition and room and board. Student loans, federal or private, can be used for a wide variety of expenses that you might not think of. For example, school books, a laptop, and gear for your dorm can all be paid for with student loan money if you don’t have any other funds to cover those costs. Additionally, they may be used to pay for transportation to and from school.
Factoring in all of your required expenses can help you be sure that you take out as much as you need without going into unnecessary debt.
- What Can My Student Loan Be Used For?
Student loans can be used to cover any expenses related to your education. These include tuition, room and board, and books. They can also include expenses related to your ability to attend school, like transportation costs, food, and other living expenses.
- Do I Need to Demonstrate Financial Need for a Federal Student Loan?
The short answer is no. Direct Subsidized Loans are often only available to students who demonstrate financial need. Direct Unsubsidized and Direct PLUS Loans can be obtained by students with no demonstrable financial need.
- When Will I Get My Money?
Student loans are disbursed to your school to cover tuition and fees. After these costs have been covered, your school will give you the remaining amount of financial aid.
- What if I Drop Out of School?
Most deferment programs require you to be enrolled at least half-time. Dropping out of school may result in you having to immediately begin paying back your loan.
Based on a 10-Year loan, $25,000 loan with 6% interest