Tips for Getting Student Loans

Preparing for Student Loans – Before taking out student loans for education. It is important to become familiar with some basic information about different types of student loans

What are Federal Student Loans?

Sticking to federal loans is usually the best choice for most would-be students. It doesn’t matter if you’re 16 or 60 The very first thing you should do when you’re getting ready to start college is to fill out the Free Application for Federal Student Aid otherwise known as FAFSA. I could write another whole guide on the FAFSA but for now, what’s important about it is that you fill it out to the best of your ability. Just about every U.S. citizen who graduated high school/has their GED, signed up for the Selective Service (males), and hasn’t been convicted of selling drugs will likely qualify for some type of aid, unless you or your parents make boatloads of money.

 

What are Federal Perkins Loans?

The FAFSA will tell you if you are eligible for a Federal Perkins Loan or a Stafford Loan. Perkins loans are doled out by your school (not all schools are in the program) and have a fixed interest rate of 5%. The government is actually moving to phase out Perkins loans with the last available ones being given by September 30, 2017. Your school will apply whatever amount you get to your bill for tuition and boarding. Sometimes, there will be some extra leftover, which will come back to you in the form of a check. Since these loans are being phased out in less than a year, there isn’t much else to say about them until it comes time to repay them.

 

What are Stafford Loans?

These are the loans you may end up with if your parents’ expected financial contribution is fairly low. There are two versions of the Federal Stafford Loan

  • Subsidized Stafford Loans – Interest on a subsidized loan doesn’t kick in for you until after the 6 month grace period for repayment. Technically, it does accrue but the government subsidizes it by paying the interest for you. These are usually given to those coming from lower-income families.
  • Unsubsidized Stafford Loans – Interest starts accruing immediately but you aren’t required to pay it while you are in school. Once you graduate, all of the interest that has building up since you started school will be added onto the principal of the loan.

Interest rates on these loans can vary depending on when they were first given to you and whether you are an undergraduate or graduate student. Grad students can still get Stafford loans, but they can expect to pay a higher interest rate, usually around 5%.

What are PLUS Loans?

PLUS loans are taken out by your parents, in their name only, to help you pay for school expenses. Most of the time, they are only taken out when Stafford and Perkins loans aren’t enough to cover everything school-related. You tend to see them more with schools that have a higher cost of attendance.

Unlike those two loans however, the interest rate is 7.9% and your parents’ credit history does play a role in whether or not they qualify for a PLUS loan.

 

What are Pell Grants?

Though this isn’t a loan, your loans through your FAFSA are likely going to be based around how large of a Pell grant you receive. You don’t need to repay this grant and can get up to $5,815 for the upcoming school year. In reality, you will probably receive far less than the maximum, which is usually reserved for students who come from extremely low income families. If you receive a full ride scholarship of any kind (athletic, academic, essays, etc.) you are not eligible to receive Pell grant funds.

Those are your main federal loan options, but you might be able to find some state-specific loan options if those aren’t enough.

What are Private Student Loans?

For some students, private loans need to be taken out to cover the cost of attending college. This is usually because their parents make too much money to be awarded very much in the form of financial aid and their choice of college is relatively expensive. You might find a lot of graduate level students in this same boat, mainly because government options start drying up once you get your Bachelor’s degree.

 

Facts About Private Student Loans

Student loans from a private lender work in much the same way as a government student loan as far as paying for school goes. However, there are also some major differences.

  • Interest rates can vary widely – There are some private student loans that have interest rates well below PLUS loans. On the other hand, you could end up with a ridiculous interest rate of over 10%. It all depends on a variety of factors.
  • Your credit score is taken into account – Public lenders don’t look at your credit score, but they might look at the credit history of your co-signers. Private student loan lenders will usually take your credit score into consideration when deciding whether or not to give you a loan, and what kind of interest rate you’ll get. You can find a good baseline credit score at Credit Karma or Credit Sesame.
  • You cannot (usually) discharge them in bankruptcy – Like federal student loans, you won’t be able to get rid of private student loans just because you declare bankruptcy. There are certain conditions that will warrant a discharge, which I will talk about below.
  • There are no cancellation or forgiveness programs – Going into certain professions with federal student loans gives you the chance to have them forgiven or cancelled. This is 100% NOT the case with private student loans. At the end of the day, a private lender is out to make money, cancelling a loan because you became a social worker won’t fly for them.
  • There is no income-based repayment plan – You’re stuck with your monthly payment whether you make $28,000 a year or $228,000 a year. Private lenders generally will not adjust your payments based on your income, unlike federal loans which can fluctuate to match what you can afford.

That’s the gist of the difference between federal and private student loans. Obviously, federal loans are almost always going to be the best option since there is a lot of flexibility around who can qualify for them and repayment plans.

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