Going to college can be an exciting step toward the future you want, but how will you pay for it?
Just as it takes time and energy to figure out what to major in and where to go to school, learning how to pay for college requires its own research and careful planning before that first-year enrollment.
With so many options available to help pay for school—student loans, grants, scholarships—it can be difficult to even know where to start.
Of course, it would be great to have free money to go to college. A savvy student would look into available college grants and apply for a plethora of scholarships to help pay for school. Most students, however, still need to take out student loans to cover their college costs.
Even though student education loans are an investment in your future, it is necessary to do your research and find the best option that works for you.
What Are the Different Types of Student Loans?
We can split student loans into two categories—federal loans and private loans.
The U.S. Department of Education administers federal student loans. Students should apply for and use these loans first due to their low interest rate that is set by the government. Federal direct loans have a fixed interest rate and have a variety of repayment options available to student borrowers.
Private student loans are loans that come from a private financial institution, such as a bank or a credit union. You should take these loans out only after all federal loan options have been exhausted.
Private loans typically have higher interest rates than federal loans and often require an established line of credit. For first-time borrowers, this means having a co-signer to access private student loan money.
Since both federal and private loans are valuable tools to help pay for college, it is important to know exactly which types are available to you.
Dr. Kelly Richmond Pope of DePaul University overviews the different kinds of loans and unveils the truth about what they mean:
She reveals more financial advice and practical tips in Outlier’s free College Success course.
Federal student direct loan programs usually have a few perks, such as flexible repayment terms and fixed interest rates that won’t increase over time. Federal student loans typically do not require a co-signer or a specific credit rating but do have loan limits.
Some federal loans qualify for student loan forgiveness, especially if you choose a career path in public service.
Here are a few different types of direct federal student loans:
1. Direct Subsidized Loans
The government grants subsidized loans to undergraduate students who exhibit financial need, as shown when comparing the cost of attendance (COA) to your estimated family contribution (EFC) to help pay for college.
If you receive a subsidized loan, the government will pay off the interest that accrues while you attend school and for a six-month deferment after you graduate. This gives you time to find a good job before repayment starts and significantly cuts the amount of accrued loan interest you need to make monthly payments on.
Subsidized federal student loans should be the first student loan taken out by any college student.
2. Direct Unsubsidized Loans
An unsubsidized loan is available to undergraduate and graduate students from all income levels. You do not need to prove your financial need to secure an unsubsidized loan.
If you receive an unsubsidized loan you will start accruing interest right away, meaning the government does not pay the interest for you. The interest rates of unsubsidized loans tend to be significantly lower than private loans since the federal government sets them.
Similar to subsidized loans, unsubsidized loans do not require payment until after your six-month grace period post-graduation from college, but you will have much more interest to pay back.
3. Federal Direct PLUS Loans
PLUS loans come in two different categories—Parent PLUS Loans and Graduate PLUS Loans. PLUS loans are available to the parents of college students and graduate/professional students.
Parent PLUS loans and Grad PLUS loans have a higher interest rate than other federal loans, but the rates are usually still lower than the rates for private loans. PLUS loans require a credit check. The government may decline borrowers with an adverse credit history or little credit history for the PLUS loan or may require them to provide a co-signer.
6 Types of Private Student Loans
A bank, credit union, or another private lender issues private student loans. Since the government does not administer private student loans, they vary widely in terms of interest rates and borrower prerequisites.
Private student loan amounts can cover most of the costs associated with higher education, including books, resources, and living costs, on top of tuition and school fees.
Private student loan eligibility requires that your enrollment in an accredited educational institution on at least a half-time basis to approve a loan. Depending on your credit score, you may be required to obtain a co-signer to obtain funds as well.
Since private loans usually have much higher interest rates and fewer benefits than federal loans, it is wise to research private loans very carefully before signing up.
Here are a few examples of private student loans:
1. General Private Student Loans
Banks issue typical private student loans, and you apply for them online through the financial institution's website. The bank will want to know the total cost of college, including all living expenses, and will run a credit check.
For students with poor credit or a lack of credit history, you will need a creditworthy co-signer for the loan to be approved. The interest rates on private student loans can vary widely and are based mostly on the credit score of the borrower or co-signer.
Many banks will offer borrowers a choice between a fixed interest rate loan or a variable loan. While the initial interest rates of variable loans may be lower, approach these loans with caution, since the rates can fluctuate on a month-by-month basis.
Most students access these loans to pay for additional college costs after accessing all federal student loan options.
2. Parent Private Student Loans
Since it takes time to establish a good credit score, parent-student loans are quite common. These are loans taken out by a parent to help their child pay for their educational expenses.
The advantage of a parent loan is that a better credit score results in a lower interest rate, saving a lot of money in the long run.
For parents co-signing on a loan for their children, several banks offer a co-signer release program. This is where the co-signer is taken off of the loan obligations after 12 months of on-time loan payments.
3. Credit Union Student Loans
Your local credit union may be the perfect place to look when it comes to accessing private student loans.
While banks are typically for-profit institutions, credit unions are non-profits that are member-owned. This means that the interest rates on student loans may be quite lower than those at for-profit banks and have perks like no origination fees.
Since terms and interest rates can vary so much, it would be wise to check with your local credit union to see what student loan options may be available to you.
4. Student Loan Refinancing
A great option to consider after graduating from college is to refinance your student loans. Most financial institutions offer refinancing options to borrowers once they have established reliable payments.
Refinancing means a bank or credit union will pay off your loan for you and give you a new loan at a lower interest rate. Typically, you need to have a credit score in the upper 600s and solid payment history to qualify for refinancing.
By choosing to refinance a student loan, you could be reducing your overall interest payment by thousands of dollars.
5. Income Share Agreements
Income Share Agreements (ISAs) are a type of loan that a student repays based on their expected future salary. ISAs can save you lots of money compared to high-interest private loans but are often higher rates compared to federal loans.
Students who plan on going into a profession where they have a high annual income (think doctors and lawyers) will often be able to pay off their loans much faster after graduation.
While the terms of the loans may be lower, so will the interest rates on ISAs. Look into a variety of financial institutions for ISA options if you plan to go to school for a high-paying career.
6. International Student Loans
Since most international students cannot qualify for federal student loans, there are many private loans available to help these students go to school.
While eligible noncitizens can still access student loans and should, most international students will need to look into private loans. With the requirement of a co-signer with established credit in the upper 600s, international students can access the money they need to pay for all their college expenses.
How To Apply for a Federal or Private Student Loan
When trying to figure out how to get money to pay for college, there are a few simple steps to follow. Make sure to start early and fill out all the information correctly. Remember that just because you qualify to take out a certain amount of money does not mean you need to do so.
Go through these steps when applying for student loans:
To fill out the FAFSA, you will need your social security number, bank statements, and tax documents of all people over 18 in your household. The IRS Data Retrieval Tool on the FAFSA website can help put this information into your application.
Dependent undergraduate students will need to put in their parents’ financial information as well.
Be certain that all the information is accurate since multiple agencies will use your FAFSA application for a variety of financial aid. Each year the FAFSA opens on October 1st. Knowing this, you should fill it out right away, giving you plenty of time to explore your options.
Outlier’s FAFSA Guide walks you through the FAFSA process to ensure you fill it out accurately.
Step 2: View Your Student Aid Report
Within 2 weeks of filling out your FAFSA, you will be able to review your (SAR) Student Aid Report. The SAR will give a summary of all the information you put on the FAFSA, be sure this information is all correct.
It will be the information on the SAR that determines if you qualify for any federal grants, work-study programs, and which student loans you qualify for. These exact amounts will come from your chosen college or higher education institution(s) shortly, usually around February.
Step 3: Apply for Scholarships
Scholarships are free money that is awarded from a variety of institutions based on merit, being worthy or deserving. While grants are free money that is given out based on financial need, scholarship money can be given to anyone that applies.
Many colleges and universities pay for a service that helps identify and apply for scholarships that you qualify for. Find out how to access this service from the Financial Aid Office on campus.
Scholarships usually require a few personal details on an application and often require an essay to be written. By taking the time to apply you could earn thousands of dollars in money you do not need to pay back.
Step 4: Review Your Awards and Add Up College Expenses
By May 1st you should know how much money in scholarships and grants you will receive for the fall semester as well as how much you qualify for in federal student loans.
Your college will also release a cost estimate of what your total expenses, including living costs, will be for the following school year. By taking the college costs and subtracting your scholarships, grants, and federal loans, you will know how much more money you need to go to school.
Step 5: Explore Private Student Loans
Now that you know how much money you need in private loans, it is time to find the best option. Sites like Credible offer a marketplace for you to shop for private student loans and compare your offers.
If you have poor credit or no credit, talk to a parent or family friend about being a co-signer to help you lower your interest rates.
Remember, variable interest rate loans can be tempting, but most often the fixed interest rate loans will save you money in the long run.
Choose the loan, financial institution, and loan terms that work best for you and apply.
Once you get a decision back from the lender, take the time to read through the details and accept the loan. Since most private loans do not have borrowing limits, be sure to only take what you need.
Step 6: Repeat the Application Process Each Year
Since your financial situation typically changes each year, you have to fill out the FAFSA form every academic year you are in college.
You also have to apply for scholarships and grants every year.
While private student loans typically offer a streamlined process to apply each year, you should access free money and federal student loans before taking out more private loans. This will save you the most money over time.
What Is the Best Type of Student Loan?
While applying for a student loan is a simple process, paying it off can be challenging. It is important to plan your student loans carefully to save money in college.
Federal student loans are the best option, due to the low-interest rates and flexible repayment plans. While federal student loans are preferable, some students exceed the maximum amount and still need more money in student loans to pay for college.
Private student loans can cover the costs that federal loans, grants, and scholarships do not pay for.
Selecting the best private student loan will depend upon your financial circumstances, your credit score or co-signer, and your repayment terms. Finding the best loan for you requires careful research and planning to minimize your student debt.
By taking the time to look into a variety of financial aid options, you can get the money you need to pay for school and find a clear path to loan repayment and future financial freedom.
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