Paying for College with Student Loans

When savings and scholarships aren’t enough to fund your education, student loans are an option to consider.

Parents with son looking online at Private Student Loan options available at UWCU.

With college prices rising faster than Americans’ average wages, you may find that your bank accounts don’t cover the entire cost of a four-year degree. The good news is that you’re not alone. Plus, there are numerous resources to help you fund your higher education.

If you think student loans might be in your future, your first step is filling out the Free Application for Federal Student Aid (FAFSA). Even if you’re confident that your savings or scholarships will cover all of your college expenses, it’s in your best interest to complete the FAFSA.

FAFSA basics

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:

After your FAFSA has been processed, your school will send you a notice about your financial aid award. It shows how much one year of attendance is expected to cost, also known as your cost of attendance (COA). This notice usually includes an estimate of what you’ll pay for tuition and fees, room and board, and textbooks. It will also list any other types of financial aid you’re eligible for, including:

  • Federal, state or institutional grants
  • Scholarships 
  • Federal student loan options
  • Work-study program options
  • Your expected family contribution (EFC)

Sometimes federal loans, scholarships, student savings and family funds don’t cover the entire COA. Private student loans can fill this gap, but your award notice usually won’t include information about them. Read on to learn more about the different types of student loans.

Understanding your federal student loan options

Most students are eligible for at least one of the following types of federal Direct Loans:

  1. Subsidized loans
    If your FAFSA indicates that you have a high level of financial need, you will be probably be eligible for a subsidized Direct Loan. As long as you’re enrolled in college at least half-time, you will not accrue interest on this loan.

    When you graduate or drop below half-time student status, you will have a 6-month grace period. During this time, you won’t need to make payments and you won’t accrue interest.

  2. Unsubsidized loans
    No matter what level of financial need your FAFSA shows, you’ll probably be eligible for an unsubsidized Direct Loan. Once the money you’ve borrowed is sent to your school, it starts accruing interest. It accrues interest every day.

    You’re not required to make payments, even toward the interest, while the loan is deferred. But if you’re able, making payments toward the interest is a smart choice. It will save your money in the loan run.

  3. PLUS loans
    Graduate students are eligible for PLUS loans, as are parents of dependent undergraduate students. Unlike other types of federal loans, PLUS loans require a credit check. If your credit score is less than ideal, you may need to apply with an endorser, otherwise known as a co-signer. Dependent children of parents that get denied for a PLUS loans may qualify for additional unsubsidized Direct Loan funds. Talk to your school’s financial aid office if this happens.

If you’re an undergraduate, the amount you’re eligible for each school year depends on your year in school and your dependency status. The maximum you can borrow through the Direct Loan program is $57,500, at a fixed interest rate determined by the federal government. If you’re a graduate student, you can borrow as much as $20,500 each year, with a maximum of $138,500. You can find out more details about what you would be eligible for on the Department of Education’s website.

Concerned this won’t be enough to pay for school? Read on to learn about one option for filling the gap: private student loans.

Understanding your private student loan options

Private student loans are education loans offered by banks, credit unions and other lenders that are not a part of the federal government.

If you will still have a COA balance after your scholarships, grants and federal loans are applied, you’re probably a good candidate for a private student loan. You may also be a good candidate if you’re an international student who isn’t eligible for federal financial aid. Or you might choose a private student loan because it has a better interest rate than the federal loans you’ve been offered.

You don’t need to complete a FAFSA to qualify for private student loans. These loans instead work more like a car loan or credit card. They usually have credit and income requirements instead. In most cases, the higher your credit score, the lower the interest rates you’ll be offered. If your credit score is on the lower side, or if you have no credit, you’ll probably need a co-signer with a strong credit score and steady income.

Here are some other things you should know about private student loans:

  1. You’ll need to choose between a fixed interest rate and a variable interest rate. A fixed rate will stay the same for the life of the loan. A variable rate can increase or decrease depending on the economy. If a variable rate increases, your monthly payment will likely increase as well.

  2. Fees, 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 available. You’ll typically have between 10 and 15 years to pay back the money, but every lender offers different choices. Make sure you know the repayment term for each loan you’re considering.

    Likewise, repayment plans and rules differ from lender to lender. Many private lenders let you defer payments until you’re finished with college, or up to a maximum period of time, but some require you to make small payments while you’re in school. Be certain you know what’s expected before signing on the dotted line.
  1. Some loans are for families or specific populations of students. Some lenders offer private student loans for specific situations. This includes parents taking out the loan in their names for a student, studying for the bar as a law student or completing a residency program after medical school.

Benefits each type of lender may offer

Whether you’re borrowing from the federal government, a private lender or both, know the benefits that come with your loans. Benefits of federal student loans include:

  • Income-driven or income-contingent repayment plans: You can make smaller payments on your federal student loans by switching to one of these plans. If you’re not earning any income, your payment could be zero.
  • Loan forgiveness programs: After 10 years of service, employees of some nonprofit organizations and government agencies may apply to have their federal student loans forgiven through the Public Service Loan Forgiveness program. A similar program exists for teachers in low-income public schools. Members of the military may also qualify for loan-forgiveness programs offered by the Army, Navy, Air Force, National Guard or Coast Guard.
  • Opportunities to postpone payments: You can hit the pause button on your federal loan payments for up to three years if you’re experiencing financial difficulties. Private lenders may offer a deferral benefit, but it’s usually for a shorter amount of time.

Private student loans have some benefits, too. They include:

  • Interest-rate discounts: Private lenders may offer these discounts to borrowers for a variety of reasons, from maintaining good grades to signing up for automatic payments.
  • Other perks: Benefits such as deferral of payments while in school, postponing payments until you’ve graduated and releasing your co-signer from the loan are available from some private lenders. Certain lenders even offer free study resources for student borrowers.

You may also want to consider some less conventional ways to fund your education, from taking out a home equity line of credit (HELOC) to 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 it if you receive one.

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