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College is an expensive investment, but there are many types of financial aid available.
Some types of financial aid, like grants and scholarships, do not need to be repaid. Loans, on the other hand, must be paid back with interest.
For this reason, it’s important to be informed as you and your child make decisions related to taking out loans for college.
Here are five things you need to know about student loans.
1. Types of Student Loans
There are two main types of student loans: federal student loans and private student loans.
- Federal student loans, as you might guess, come from the federal government. They typically offer lower interest rates than private student loans, and they should be your first option.
If your child doesn’t qualify for enough grants, scholarships, or federal student loans, you may then want to consider a private student loan.
- Private student loans are traditional, credit-based loans made in the student’s name. Unless your child has a credit or work history, you will likely need to sign as a guarantor. This is a pledge to make the loan payments if your child does not do so.
Some lenders have maximum loan amounts, while others will allow you/your child to borrow up to the total cost of your child’s education.
Interest rates vary and are dependent on credit and the economy.
Usually, your child will be allowed to defer payments until after completing school.
Sometimes lenders also allow a six to nine month grace period following graduation.
Others may require payments while still in school or immediately after graduation.
2. How to Apply for Student Loans
To apply for a federal student loan, you simply fill out a FAFSA (Free Application for Federal Student Aid).
This will require you to answer questions about your income, tax returns, and other financial history.
Based on the results of the FAFSA, your child’s college will send an email or letter called a “financial award letter.”
- This will tell you which federal student loan options your child qualifies for. Your child will accept or reject these loans. He can also accept a partial amount if desired.
The loan money disburses to your child’s school, who will use it to cover costs like tuition and room and board. If there is additional money remaining, this money will go to your child.
- To apply for a private student loan, you’ll have to find a lender.
- Most lenders have online applications available, but you can also call or visit in person if you have questions or concerns.
You can check with banks, credit unions, and private lenders.
3. Available Federal Student Loans
The most common type of federal student loan is the Direct Stafford loan. It is also the most low-cost type of student loan that is not needs-based.
To qualify for the Direct Stafford loan, undergraduate and graduate students must be in school at least half time.
- This generally means 6-8 undergraduate credit hours and 5-6 graduate credit hours.
The maximum amount of money your child can receive varies depending on classification: freshman, sophomore, junior, senior, or graduate student.
- The interest rate for undergraduate students on a Direct Stafford loan is 3.76%, while the interest rate for graduate students rises to 5.31%.
- Perkins loans are offered to students with exceptional financial need, whether they are undergraduate or graduate students. The Perkins loan allows undergraduate students to borrow up to $27,500 per year. Graduate students can borrow up to $8,000.
Although these loans are backed by the federal government, they are distributed by the individual colleges and universities.
Even if your child qualifies for the maximum amount of the Perkins loan, this amount may not necessarily be available at your child’s school.
- Students who take out a Perkins loan and go into careers such as the military, legal work serving the public, teaching positions in low-income areas, practicing medicine in low-income areas, or volunteering with the Peace Corps or Teach for America may be eligible for full or partial loan forgiveness.
Perkins loans have a fixed interest rate of 5% and are generally repaid over a 10-year period.
Neither the Direct Stafford loan nor the Perkins loan requires credit scores or collateral, and both can be consolidated upon graduation.
- The Federal PLUS loan (Parent Loans for Undergraduate Students) is taken out by a parent to help pay for their child’s education. If you decided to pursue a Federal PLUS loan for your child, the loan would be in your name.
- The loan allows parents to borrow up to the total cost of tuition, and payments must be made beginning six months after the graduation of the child.
The interest rate on this loan is 6.31%, and the parent must also pay a 4.272% origination fee for processing the loan.
4. Subsidized vs. Unsubsidized Loans
Student loans can be subsidized or unsubsidized, depending on the financial need of the student and the student’s family.
- If your child qualifies for a subsidized loan, the government will pay the interest while your child is in school and for six months following graduation.
- Students with unsubsidized loans are responsible for full interest costs.
Since Perkins loans go to students with the highest need, all Perkins loans are subsidized.
- Additionally, students who receive Perkins loans are given a nine-month grace period following graduation.
- After the nine months, they must begin paying interest costs associated with the loan.
For Direct Stafford loans, the results of your FAFSA will determine whether your child receives a subsidized or unsubsidized loan.
5. Loans for Health Professionals
If your child is pursuing a career in a medical profession, extra schooling will likely be required.
- For this reason, there are loans available through the Health Resources and Service Administration (HRSA) for future health professionals who demonstrate financial need.
- The three main health student loan programs are the Loans for Disadvantaged Students Program, the Health Professions Student Loan Program, and the Primary Care Loans Program.
All of these loans are available to full-time students only.
Students don’t pay interest while in school and for a twelve-month period following graduation.
5% interest is charged once this grace period is over, and students are given ten years to pay back their loans.
6. Discuss the Cost of Student Loans
Be sure that your child understands the realities of student loans.
- It may seem like “free money” right now, but your child should be aware that she will be paying off college loans for possibly decades into the future.
This could lead to extensive debt and financial stress.
Of course, the benefits of a college education typically make taking out college loans worth the cost, but your child does need to be aware of the difficulties these loans may cost in the future.
7. Consider Other Options
To offset the cost of college loans, there are a few other options to consider.
For example, your child could attend a much less expensive junior or community college for the first two years.
- The first two years of college are mostly focused on meeting General Education (Gen Ed) requirements in English, mathematics, science, sociology, and history. These courses are available at two-year institutions as well.
To save on the cost of tuition, many students decide to fulfill General Education requirements at a two-year college, and then go on to a four-year college or university to complete the specific, higher level courses for their degree.
You can also apply for as many scholarships and grants as possible to reduce the costs of student loans.
Deciding to take out student loans is a decision you and your child should weigh carefully. Fill out the FAFSA, consider the various options available to you, and make the choice that is right for your family.
We hope that this information about student loans will make the process as smooth and stress-free as possible!