Paying for College with Student Loans

When contemplating loans for higher education, start by filling out the FAFSA (Free Application for Federal Student Aid) - even if you think you won't qualify. The FAFSA is required to determine your eligibility for some sources of free money, such as state and federal grants. It also determines if you’re eligible for the following:

• Federal Direct Loan programs
• State loan programs
• Federal work-study programs
• Some school-funded programs

Schools determine your eligibility for grant and loan programs by using information provided in the FAFSA.

Federal student loan options

Most students are eligible for at least one type of federal direct loan:

• If your FAFSA indicates high financial need, you may be eligible for a subsidized direct loan (no interest accrues when you're enrolled at least half time).
• No matter your financial need, you may be eligible for an unsubsidized direct loan (interest begins accruing at disbursement). Pay toward the interest any time without penalty.
• Graduate students and parents of dependent undergrads are eligible for PLUS loans, which require a credit check. Dependent children of denied parents may qualify for additional unsubsidized direct loan funds.

As an undergraduate, the amount you're eligible for is based on your year in school and dependency status (from $9,500 to $12,500 for freshmen). Graduate students can borrow up to $20,500 per year.

Concerned you still won't have enough? Consider a private student loan.

Private student loan options

Private student loans are offered by banks, credit unions and other post-secondary education lenders. They are not part of the federal government. 

You don't need to complete the FAFSA to qualify for a private student loan but doing so is in your best interest. Private loans work more like a car loan or credit card. They usually have credit and eligibility requirements, including proof that you can repay the amount requested.

In most cases, the higher your credit score, the lower the interest rate you'll be offered. If your credit score is on the lower side, or if you have no credit history, you'll likely need a cosigner with a strong credit score and steady income.

More about private student loans:

• Choose between fixed and variable interest rates. A fixed rate stays the same for the life of the loan. A variable rate can go up or down with the economy. If a variable rate increases, your monthly payment will likely go up as well.
• Rates, terms and repayment plans differ from one loan to the next. When you borrow money from a private lender, pay attention to the repayment term options. You'll typically have 10-15 years to pay back the money, but every lender offers different choices. Many private lenders defer payments until you graduate. Some require small payments while you're in school. Know what's expected before signing an agreement.
• Some loans are for families or specific populations. For example, lenders may offer private student loans for completing a residency program or studying for the bar.

Varying benefits

Whether you're borrowing from the federal government, a private lender or both, know the benefits that come with your loans.

• Income-driven or income-contingent repayment: You can make smaller payments on your federal student loans by switching to one of these plans. If you have no income, your payment could be zero.
• Loan forgiveness: After 10 years of service, employees of nonprofit organizations and government agencies may apply to have their federal student loans forgiven through the Public Service Loan Forgiveness Program.
• Postponing payments: You can pause federal loan payments if you're experiencing financial difficulties. Private lenders may offer a similar benefit.
• Interest-rate discounts: Private lenders may offer discounts for maintaining good grades, signing up for automatic payments or other reasons. Federal loans offer a discount for signing up for automatic payments as well.
• Other perks: Some private lenders offer deferred payments while in school or release your cosigner after a certain number of on-time payments.

You might also consider less conventional ways to fund your education, including a home equity line of credit (HELOC) or borrowing from a family member. Or, better yet, double down on your scholarship search. Like grants, scholarships are free money for your education, and spending just a few hours applying for them can be well worth the effort. Your school's financial aid office is a great resource for scholarship information.