In 2019, 19.6 million students were enrolled in a college program. That feeling of getting a college acceptance letter or email from your dream school is unbeatable. After you get into your dream school, there are so many things you need to think about.
One of the most important things you have to think about is paying for school. Undergraduate students and their parents are new to trying to navigate the world of loans. There are a lot of loan options you have to take into consideration when applying.
This guide will walk you through private student loans, consolidation loans, and different types of loans, loan options for each type, how to deal with the loan amount, federal direct loans, what the department of education provides, financial aid offices, and different loan payment.
Table of Contents
Federal Student Loans
Getting into a great school might seem like the easy part after applying for student loans. The department of education oversees these loans.
Federal loans are the most common student loans you can apply to. You don’t need a credit score to apply for them, which makes them more accessible for students who might not have credit built up yet.
To qualify for student loans, you have to fill out the FAFSA every year. The first year you fill out the FAFSA will be your senior year of high school (or the year before you plan on starting school).
You have to fill it out every year the year before you plan on being in school. For example, if you’re a junior in college, you have to fill it out that year to get FAFSA benefits for senior year.
When you fill out the FAFSA, you provide financial information for the student and the parent or guardian. There is a way to fill out the FAFSA if you’re an independent student as well.
The FAFSA estimates how much money it thinks your family can contribute to your schooling. The FAFSA also establishes how much financial aid you as a student need regardless of parental contributions. For example, the FAFSA determines how much students get from the Pell Grant.
To qualify for the FAFSA, you cannot have a criminal record, need to meet residency requirements, and attend a school that qualifies.
Subsidized and Unsubsidized Loans
The FAFSA determines how much you can apply for in subsidized and unsubsidized loans. The amount you can take out increases each year. This is one of the better loans for students to take out because you have an extended repayment period and low-interest rates.
Subsidized loans are a type of loan that will not accrue interest while the student is in school and for the grace period after school. These loans are only offered to students who need them financially.
Unsubsidized loan options do not have a financial assistance requirement. The interest on these loans will accrue starting when the student signs up for them.
Perkins loans are given out based on financial needs. These loans are based on how much money the student’s college can give out. Perkins loans are given out by the school.
You can apply for PLUS loans regardless of financial need determined by the FAFSA. What makes the PLUS loans different is that you have to have a good credit history to receive them. You also have to repay them in 10-30 years.
Parents of students can apply for the Parent PLUS loan to pay for their child’s school. It’s a great federal option for parents. Graduate students and higher can also apply for PLUS loans to cover schooling.
Federal loans are always going to have lower interest rates than private loans. This is why you ALWAYS want to start your financial aid process with federal loans, scholarships, and grants, before looking into private loans.
Interest rates determine what percentage of your loan is added to your total over some time. These rates can range depending on the economy but are generally stable.
Subsidized and Unsubsidized loans have a 4.29% interest rate. PLUS loans have a rate of 6.84%. Perkins loans have an interest rate of 5%.
How Repayment Works
When you or your student finish school, you want to start paying back your loans. Each company that the federal government uses to provide federal loans will have repayment plan options. For Perkins loans, the repayment plan options will depend on your school.
Standard repayment plans will give you a fixed rate to pay each month. You will have ten years to pay off these loans.
Graduated repayment will have what you pay to start lower, but it will increase over time. You can still pay back the loans in 10 years. You may end up paying more with this plan because you have a higher amount of accruing interest.
Extended plans give you 25 years to pay off a standard or graduated plan.
Pay as you earn plans to make monthly payments 10% of your income. The traditional pay-as-you-earn plan makes sure your payment is never higher than your standard plan amount. These loans can take longer than 20 years to repay, depending on your financial gains.
There are more repayment options you can pick from, but standard, graduated, extended, and pay as you earn plans are the most common.
If You Can’t Repay Your Federal Loans
Making enough money to repay your student loans can be hard for some people. The benefit of federal loans is it can be easier to work with your loan provider during financial hardship.
Deferment lets borrowers pause payments. This only applies to eligible borrowers, such as those suffering from extreme economic hardships, cancer, or becoming a member of the military. Your loans will still accrue interest during deferment.
Forbearance will pause repayments without impacting your credit score. You can have your loans in forbearance for up to 3 years. During this period, it’s recommended to try and repay at least the interest, so you don’t end up having large sums at the end of it.
Whatever you decide to do, do not miss or skip payments. Missed and skipped payments can result in late fees and hurt credit scores.
Private Student Loans
Sometimes when you’ve taken out all the federal loans you can, accepted all your grants, had your scholarships applied, you might still owe money to your school. Many schools offer repayment plans, but for some, it’s easier to take out more money. Student loans from private borrowers are the next option.
Who You Get Loans From
Private student loans come from anyone who is not the federal government. this includes banks, credit card companies, nonprofit organizations, or universities themselves.
The amount you can get for private student loans can depend on your school. For example, your school might limit the amount you take out to how much you have leftover before you hit their estimated tuition rates.
If you are going to take out a private loan, do your research and make sure they are coming from a reliable source. Many private loans require you to have a good credit score to take them out.
Interest rates can vary wildly from loan company to loan company. They can be as high as 13%. Your credit score can help determine your interest rate. The better the credit history, the lower your interest rate will be.
Interest rates on private loans can impact how much you will repay. Many of them will accrue interest while you’re in school. The more you take out, the more interest you will have and the more you will have to pay back over time.
How Repayment Works
Repayment depends on who you get the loan from. Many private loan companies will not be as lenient as federal loans when it comes to repayment. Some private loan companies will offer forbearance, but not all of them.
Many private loans will have monthly repayment plans that you can follow. Often you get to decide what amount you pay each month.
Refinancing your private loans is a great way to help with repayment. If you’re in a better place financially, refinancing can help reduce your interest rate.
Dangers of Private Loans
There are a few reasons why you should wait until after seeing what your federal loans, grants, and scholarships cover before you take out private loans.
Many private loans will not base repayment on income. You may have to repay the same amount regardless of your financial situation. This can cause issues if you miss payments due to a lack of income.
Private loans can also ruin the credit of both you and your cosigner. If the student misses a payment or defaults on a loan, they and the cosigner will have a credit hit that will impact their credit report until it is repaid.
The impact private loans can have on your future is something that should be taken into account before you apply to them.
If you’ve taken out a lot of loans, it may be easier to combine them into one bigger loan. The loans can come from a variety of sources.
It can be a lot easier to repay a consolidated loan plan because you only have to send money to one source versus a variety. But, you can have a longer repayment period and higher interest rates.
Getting Help with School Loans
Private student loans and federal student loans can seem overwhelming at times. There are a lot of resources out there to help you make the right choices.
If you want more help planning for your financial future, contact us today. We can help guide you through everything you need to know.