If you want to attend college and earn a college degree, one of the biggest roadblocks you’ll need to overcome is how to pay. Generally speaking, not having a full ride or a slew of college scholarships means you’ll need to pay in cash or take out student loans.
One of the biggest issues you’ll face financing schools is in regards to the rising costs of higher education. For the 2017-18 school year, average tuition at public, four-year schools worked out to $9,970 per year but ballooned to $20,770 per year when you add in room and board. Average costs for private nonprofit schools worked out to $34,740 in tuition and $46,950 in annual costs when you include room and board. No matter how you cut it, that’s a lot of cash.
With expenses like these on the horizon, it’s also important to understand the student loan options that may be available. While borrowing money for school may not be ideal, having the right loans for your needs can make all the difference.
Federal Student Loans
Generally speaking, there are two main types of student loans — federal student loans and private student loans. However, there are many types of federal student loans to fit certain types of student borrowers. Federal student loan options include:
Direct Unsubsidized Loans
Direct Unsubsidized Loans are made to eligible undergraduate, graduate, and professional students. While some loans require students to demonstrate financial need, these loans are available to college students at any income level.
If you are an undergraduate student, you are limited to $5,500 – $12,500 in unsubsidized or subsidized federal loans each year. If you are a graduate student, you can borrow up to $20,500 in Direct Unsubsidized Loans each year.
The interest rate on Direct Unsubsidized Loans made between 7/1/2017 and 7/1/2018 is 4.45%.
Direct Subsidized Loans
Direct Subsidized Loans are available to students who can demonstrate a financial need. Undergraduate students who qualify can borrow between $5,500 and $12,500 in Direct Subsidized Loans each year depending on certain factors. The interest rate on Direct Subsidized Loans made to undergraduate students between 7/1/2017 and 7/1/2018 is 4.45%, while graduate student loans are offered at 6%.
Direct PLUS Loans
Direct PLUS Loans are for graduate and professional students and parents of dependent undergraduate students. These loans are available to cover the rest of higher education costs that cannot be covered with other student loans or financial aid. Direct PLUS Loans come with an interest rate of 7% when made between 7/1/2017 and 7/1/2018.
Direct Consolidation Loans
If you have student loans already but want to reconfigure the way they are set up, you may want to consider a Direct Consolidation Loan. These loans combine all of your eligible federal student loans into a new loan with a single monthly payment. The interest rate on a Direct Consolidation Loan is figured by taking the weighted average of all your current student loans.
How Do You Apply for Federal Student Loans?
The process for applying for federal student loans is the same no matter which type of loan you hope to receive. You’ll fill out a federal loan form known as the Free Application for Federal Student Aid, or FAFSA. This form requires a wide range of personal and financial information that helps the government and schools determine which loans and other aid you may qualify for. Information you’ll need to fill out a FAFSA form includes:
- Your Social Security Number
- Your Alien Registration Number if you are not a U.S. citizen
- Your federal income tax returns, W-2s, and other records of money earned.
- Bank statements and records of investments (if applicable)
- Records of untaxed income (if applicable)
- An FSA ID to sign electronically
Benefits of Federal Student Loans
If you’re curious whether federal student loans are the best option for your needs, it helps to know the biggest perks they offer. Some of the advantages of using federal student loans to finance your college education include:
- You may qualify for income-driven repayment programs that can lead to loan forgiveness after 20-25 years.
- You receive certain federal protections including deferment and forbearance.
- Federal student loans come with predictable, fixed interest rates.
- You can qualify for federal student loans regardless of your credit history or lack thereof.
- You don’t have to start repaying your federal student loans until you graduate college, leave school, or move to half-time enrollment.
- Undergraduate students who can demonstrate financial need may qualify for subsidized loans, meaning the federal government pays interest on their loans while they are still in school.
- Interest may be tax-deductible.
- There is no prepayment penalty on federal student loans.
Disadvantages of Federal Student Loans
While federal student loans are easily the best option in most cases, that doesn’t mean they’re perfect. Some of the downsides of federal student loans include:
- Interest rates may be higher than private loans. Direct PLUS Loans come with an APR of 7%, after all.
- While there are several payment programs available, there are more options available on the private student loan market.
- Interest rates on federal student loans aren’t negotiable and you can’t shop around for a better deal.
Private Student Loans
While federal student loans are a solid option for most student borrowers, many students also turn to private lenders to finance their college education. With private student loans, you can shop around for the best deal and lowest interest rate and apply for a loan with a lender of your choosing. Some private lenders even offer signup bonuses for students who apply, and many offer interest rates as low as 2.47% on certain types of loans.
Still, private student loans aren’t the best option for most students. Due to the federal protections and tax advantages that come with federal loans, most experts suggest you exhaust all federal student loan options before turning to private loans.
On the flip side, the private student loan market is a very popular option for students who want to refinance their student loans. This is mostly due to the fact that students with good credit (or a co- signer) may qualify for lower interest rates. Students who have already graduated and began repaying their loans also have a better idea of whether they plan to utilize income-driven repayment programs, as well as how much they can afford to pay each month.
Benefits of Private Student Loans
While the benefits of private student loans may be limited, there are some situations where private is better. Reasons to consider private loans can include:
- Interest rates can be extremely low, especially if you have a high credit score or qualified co- signer.
- You can shop around among private lenders to find the best deal.
- Private student loans may work best for those who want to refinance and have a good idea of their repayment goals going forward.
- If you run out of federal student loan funds, private loans can help bridge the gap.
Disadvantages of Private Student Loans
Now let’s talk about the many downsides of private student loans, which may be hard to pinpoint if you only focus on the shockingly low advertised interest rates. The downsides of private student loans include:
- The lowest interest rates only go to those with perfect credit. Many borrowers end up with private student loans with APRs of 18% or higher. Some private student loans even come with variable rates.
- You need to go through a credit check to qualify for private loans. You may also need a co-signer if you don’t qualify on your own.
- Private student loans are never subsidized, meaning you’ll need to pay all interest on your loans.
- Interest is not tax-deductible.
- Private student loans typically do not come with deferment or forbearance options, nor do they qualify for income-driven repayment plans.
- Some private loans charge prepayment penalties, so make sure to check.
What It Comes Down To
Your goal should always be to take out as little money as possible for college. Do not forget to explore scholarships and grants. Both can help you pay down costly tuition and extra expenses. If you find yourself having to take out a loan, make sure to consider all of your options and weigh the pros and cons.