When you’re looking to go to college, either as a new student or a returning one, you fill out the FAFSA form, or the Free Application for Federal Student Aid, to find out what kind of help you’re going to be able to get. You might be able to receive grants or loans or work-study programs through your school based on the financial aid that you’re eligible for.
For most, getting loan approval is great, and it can definitely help you to go to school, but you’re not just getting money handed to you for nothing. You’re going to have to give that money back and you’re going to have to pay a premium for being able to borrow it in the first place. That means you’re going to pay more than you actually borrow when all is said and done.
1. Federal Loans or Private Loans?
When it comes to taking out loans you’re going to have two different options, a federal one or a private one.
When you take a federal loan it’s backed by the federal government. You’re going to have the benefit of lower rates (usually) as well. With a private loan you’re only backed by a bank or a private lender. Not to mention you’re usually going to pay more in interest.
- Federal Loans – These loans are generally available at fixed interest rates and they give you a lower cost over the long run. There are certain eligibility requirements, like being enrolled at least half-time, but there are benefits. For example, you don’t have to make any payments on the loan while you’re still enrolled in school. But you may or may not have to pay interest on the time that you have the loan.
- Private Loans – These loans are often still available at fixed interest rates (though not always) but they’re usually higher interest rates. If the rate is variable that means you’re going to pay more interest as time goes on. For this reason (and the higher interest in general) it’s usually recommended that this be your second choice after you exhaust your federal funding.
2. What to Know About Federal Loans
The loan program that you’re going to get is called the William D. Ford Federal Direct Loan Program. From there, it’s divided into two different categories that we can take a closer look at.
The two different options for a federal loan are subsidized loans and unsubsidized loans. With a subsidized loan the government is going to take care of your interest payments while you’re in school, and that means when you get out you only owe what you originally borrowed. With an unsubsidized loan, which is available to anyone, you have to pay the interest on the entirety of the loan for the entire time you have it.
This program is actually the largest student loan program run by the government and you’ll have a total of three different loan options, which we’ll look at right here.
- Direct Unsubsidized Loans – These loans are offered to anyone who wants to go to college as an undergraduate, graduate or professional student. You don’t need to exhibit any type of financial aid but you’re going to be responsible for all of the interest that accrues on the loan, even while you’re not responsible for making payments.
- Direct Subsidized Loans – These loans only get offered to students who have financial need and only to undergraduate students. With this loan, the federal government is going to take care of any interest that accrues while you’re still in school.
- Direct PLUS Loans – Graduate students and professional students, as well as the parents of undergraduate students, can use one of these loans to help pay for their schooling.
3. What Can You Afford to Borrow?
You want to take a close look at how much your tuition and college expenses are actually going to cost and then take a look at how much you can get in scholarships or grants long before you look at loans.
Next, make sure you’re taking advantage of federal loans before going with private loans. You’ll have better terms in most cases. Plus, you should make sure to stick to loans that are no more than what you should make in your first year when you get out of college.
You’ll then have to wait until it actually comes time to make the payments to find out what you can actually afford. You need to know how much you have to pay each month.The money you owe every month is going to be dependent on three different things: how much you borrowed, what you’re paying in interest and how long you have to pay it all back.
If you have a longer amount of time to pay it back you’re likely going to owe less each payment, but you’re going to be in debt for a while. If you pay less in interest you’re going to have lower payments as well, which could get you out of debt quickly.
Make sure that you know what the payment is going to be and you have a good idea how you’re going to pay that bill alongside all of the others that you probably have (like your rent and your groceries).
4. Do You Need Deferment or Forbearance?
There may be a time when you need to stop making payments for a little while in order to get yourself back on track. That’s where forbearance or deferment will come into play. You never want to just stop making payments without contacting the government first, they can help. With forbearance you’re going to have the opportunity to stop making payments for a set amount of time, but you’re still going to be adding on interest during that time.
When it comes to deferment you can stop making payments entirely, even on the interest. That depends on the type of loan you have, such as a subsidized Stafford Loan or a subsidized direct loan. You’ll want to talk with your loan provider to learn more about your options.
5. Shop Around In Case Of Private Loan
When it comes to federal loans you’re just going to get what the government wants to give you. You’re going to have specific terms offered and you just take it or not. You don’t get to make any of the choices for yourself. But a private loan gives you a whole lot of options. You get to decide who you want to work with, what kind of rates you can get and what terms you want to accept.
Make sure that when you do follow this process you’re actually looking at rates but other terms as well. You want to make sure you have some added features available, like being able to get lower interest rates if you set up automatic payments or the opportunity for forbearance. Look for flexible payment options and more when you’re considering any type of private student loan.
Another important factor is what amount of money you take out. Always take the lowest amount you possibly can and make sure you know all of the rules.
6. Grace Period
There’s generally going to be a grace period with any student loan that you get. These give you a set amount of time between when you graduate (or stop attending school) and when you need to start making payments. They’re different for each loan and some loans may not even give you a grace period at all.
If you need a way to raise some money before you’re going to be able to start making payments a grace period is crucial. But keep in mind that you can start making payments whenever you want. You don’t have to wait for that grace period to be over, especially since you could be tacking on interest during that period.
7. Pay a Little More
If you really want to get those payments out of the way quickly your best option is going to be paying more than you have to. Before you do, however, make sure you tell your loan provider that you want the money to go to the principal and that you’re not trying to get ahead on your payments. You want to make sure that you’re actually getting the benefits of lower principal and not just paying less next month.
Even better, you don’t have to pay as much extra as you might think to see benefits. You can pay just $30 more a month and see a huge dent in how much money you have to pay and how long it takes to pay things off.
8. Look at Getting a Co-Signer
Some students have difficulty getting a student loan because they don’t have any credit history, which makes it difficult to go to college. That’s where you may need someone else to co-sign a loan for you. Just make sure that parents who choose to co-sign understand what it means for them. They’re going to be responsible for the loan if the required payments aren’t being made properly.
Putting your co-signer in financial trouble, especially if they have collateral on the line, is definitely not a good way to endear yourself to them. And far too many people don’t even realize the risks that are involved. So make sure you pay close attention. Anyway, there are a couple of ways to get student loans without co-signer.
9. You Might Be Able to Deduct it
There are some benefits that go along with student loans, which are the tax deductions that you can claim. You actually get to deduct up to $2,500 a year to pay toward your student loans. If you’re earning too much, however ($80,000 for single and $140,000 for married and filing jointly) you generally can’t get this type of tax write-off, and those who earn between $65,000 and $80,000 are generally eligible only for a portion of this savings.
For those who are working on a training program within a job or who have only just graduated or even those who are still in school there’s also the possibility of a refund of up to $2,500 toward your expenses. But keep in mind you can only get one or the other and the refund is generally your best bet.