With tuition costs on the rise, in addition to a slew of other expenses like food, fees and books, student loans have become a popular way to pay for an education. Applying for a loan is a lengthy process and is not as simple as asking your parents to borrow a few bucks.
- How to acquire a student loan
- Subsidized vs unsubsidized loans
- Private Loans vs Federal Loans
- Finding the best rates and rewards
How to Get a Student Loan
The first step in applying for a loan is filling out a Free Application for Federal Student Aid (FAFSA). This application determines your eligibility for student aid and is imperative to receiving a federal loan.
Next, contact the school(s) you’re interested in attending and send the information needed to determine your eligibility to the financial aid office. They will respond with a letter displaying the amount and types of aid the school will offer you, which will help you determine if you will need a loan and for how much.
Before you run off to your bank, though, you should first apply for a Federal Student Loan. The amount you can borrow will be determined by the financial aid offer and will be need-based, and will be either subsidized or unsubsidized.
Explaining Subsidized and Unsubsidized Loans
A subsidized loan is available to students who demonstrate financial need. The U.S. Department of Education pays the interest on the loan while you’re in school, for the first six months after you leave school and/or during a period of deferment (a postponement of loan payments).
Everyone can apply for an unsubsidized loan, but interest will accrue on the loan from the time of disbursement. You can always defer, and even decide to allow the interest to accumulate and have it added to the principal amount of your loan. However, this will raise your total payments because you will ultimately be charged interest on a higher principal amount.
Once you determine which loan you will take, you can determine how much money you can borrow and at what rate. The interest rate will vary from 3.4% to 6.8% and the amount you can borrow from $3,500 to $9,500 in your first year.
If you’ve finished this process and are still coming up short, you may want to consider taking out a private loan as well.
Private Loans vs. Federal Loans
Private loans differ from federal loans in a few ways. First, the determining factor for loan eligibility is credit. If the bank/lender does not feel your credit is established enough, they may decide not to give you a loan.
Second, is the interest rate. While most federal loans come with a fixed rate of 6.8%, private lenders usually offer around 7.7% but can reach as high as 14.25%. Search for rates around 10%, and if you can, find a lender who will offer deferment options.
Look for Loan Rewards
Another important determinant is whether or not the private lender offers borrower rewards. The incentives may vary, such as interest rate reductions or principal reductions, which usually come under the pretense of on-time payments. If you play by the rules and are diligent with your payments, these can go a long way.
After securing financial aid, federal loans and if necessary private loan options, you should be able to structure a plan on paying your way through college.
- Fill out an FASFA to determine your federal loan eligibility.
- Subsidized loans allow you to wait to pay interest on your loan, while unsubsidized loans charge interest immediately.
- Private loans are a last resort.
- When determining a private lender compare interest rates, deferment options and borrower reward incentives to find out which lender is best for you.