When your savings and scholarships aren’t enough to cover the costs of higher education, student loans are a practical option to explore. Before taking out loans, it’s important to start by filling out the FAFSA (Free Application for Federal Student Aid), even if you think you won’t qualify for aid.
Completing the FAFSA is necessary to determine your eligibility for various types of free financial assistance, such as state and federal grants. Additionally, your FAFSA information helps assess your eligibility for:
- Federal Direct Loan programs
- State loan programs
- Federal work-study programs
- Some school-specific programs
Schools use the information you provide on the FAFSA to determine whether you’re eligible for grants or loans.
Federal Student Loan Options
Most students qualify for at least one type of federal student loan. The options available depend on the details you provide in your FAFSA.
- If your FAFSA reveals a high financial need, you might qualify for a subsidized direct loan. With this loan, the government pays the interest while you’re enrolled in school at least half-time, meaning no interest accrues during that period.
- Regardless of your financial need, you may qualify for an unsubsidized direct loan. With this loan, interest begins accumulating immediately after disbursement, but you can choose to pay off the interest at any time without facing penalties.
- Graduate students and parents of dependent undergraduate students may be eligible for PLUS loans. However, these loans require a credit check. If a parent’s application for a PLUS loan is denied, the student may be eligible for additional unsubsidized direct loan funds.
The amount you can borrow as an undergraduate depends on your year in school and whether you’re considered dependent or independent. For instance, freshmen can borrow anywhere from $9,500 to $12,500 per year. Graduate students can borrow up to $20,500 annually.
Still Need More Funds? Consider Private Student Loans
If federal loans aren’t enough to cover your costs, private student loans can be another option. Private loans are offered by banks, credit unions, and other educational lenders, but unlike federal loans, they aren’t supported by the government.
To qualify for private student loans, you don’t have to fill out the FAFSA, but it’s still a good idea to do so. These loans tend to resemble personal loans, such as car loans or credit cards, and often come with credit and eligibility requirements. For example, lenders may require you to demonstrate the ability to repay the loan, and your credit score will influence your interest rates.
If you have a high credit score, you’ll likely be offered a lower interest rate. But if your credit score is low or if you don’t have a credit history, you’ll probably need a cosigner with a strong credit score and steady income.
More about Private Student Loans
Private student loans come with a variety of options, so it’s important to choose wisely. Here are a few things to keep in mind:
- You’ll typically have to choose between fixed and variable interest rates. A fixed rate stays the same throughout the life of the loan, while a variable rate can fluctuate based on market conditions. If your interest rate increases, so will your monthly payment.
- Loan terms, repayment plans, and interest rates can vary significantly between lenders. Be sure to check your lender’s options for repayment periods, which usually range from 10 to 15 years. Some lenders allow you to defer payments until after graduation, while others may require you to make smaller payments while still in school. Understand your lender’s terms before signing any agreement.
- Private loans may be available for specific populations, such as students entering a residency program or preparing for the bar exam.
Benefits of Federal and Private Loans
Whether you choose federal or private loans, there are certain benefits to keep in mind:
- Income-Driven or Income-Contingent Repayment Plans: These plans allow you to make smaller monthly payments based on your income. In some cases, if you have no income, you may not need to make any payments.
- Loan Forgiveness: If you work for a nonprofit organization or a government agency, you may be eligible for loan forgiveness after 10 years through the Public Service Loan Forgiveness Program.
- Postponing Payments: Federal loans allow you to pause payments if you’re facing financial hardship, and many private lenders offer similar options.
- Interest Rate Discounts: Some private lenders offer discounts for things like maintaining good grades, setting up automatic payments, or other reasons. Federal loans also provide a discount for automatic payments.
- Cosigner Release: Some private lenders allow you to release your cosigner from the loan after a certain number of on-time payments.
If you still need additional funding, other options include borrowing from a family member or using a home equity line of credit (HELOC). However, it’s also a good idea to continue searching for scholarships.
Just like grants, scholarships offer free financial assistance for your education, and dedicating a few hours to applying can pay off in a big way. Your school’s financial aid office is a great place to start when looking for scholarship opportunities.
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