How to Pick the Right Student Loan to Pay for College
July 13, 2015

With each passing year, more and more college students are taking out student loans to pay for school. According to The Institute for College Access & Success (TICAS), about 69 percent of college students took out student loans to pay for their higher education in 2013. The average debt amount for these students amounted to $28,400 per student. TICAS also reports that the average debt amount was higher in one out of every five schools.

Navigating the Student Loan Application Process

Upon graduating, many students enter the real world with significant volumes of debt. If these students fail to find well-paying jobs, they will soon encounter a host of financial difficulties in repaying their student loans. This is why Emily Starbuck Crone highlights that it’s crucial to borrow only what you need. In addition, you’ll need to find the best student loan based on your specific situation.

Before you apply for student loans, you’ll need to complete the Free Application for Federal Student Aid (FAFSA) online. This makes you eligible for federal loans, grants and scholarships. The federal government will send a copy of your FAFSA to the schools you’ve applied to. Thereafter, the college will determine your aid package, before sending you a financial aid award letter.

These letters typically comprise two sections:

  • The gift aid section that details free grants and scholarships and,
  • The loan aid section

Students might receive offers for one or more federal loans. However, they need not accept all of these if they don’t want to. At the same time, they must not turn down the gift aid specified.

Students would need to maximize grants, scholarships, family contributions, state aid and institutional aid first. Similarly, they must accept federal work study or tuition payment plans too (if available). Only then must they start shopping for student loans – especially federal loans.

An Overview of Federal Loans

Federal loans typically feature fixed interest rates, which are lower than private loans in many cases. Federal loans comprise:

  • Federal Perkins Loans: Offered to students with significant financial need, these subsidized loans feature low interest rates. You don’t need to pay any interest while you’re in school at least half-time. In addition, you have a grace period of nine months after leaving school, before you need to commence repayments. However, not all schools offer these loans.
  • Direct Subsidized Loans (or Subsidized Stafford Loans): Aimed at students with demonstrated financial need, you don’t need to pay interest while you’re in school or if the loan is in deferment. Repayments will commence once you graduate.
  • Direct Unsubsidized Loans (or Unsubsidized Stafford Loans): Your school determines the amount you can borrow based on other financial aid and attendance costs. The interest keeps accumulating while you’re in school.
  • Direct PLUS Loans: These credit-based, unsubsidized loans for graduates or professional students (i.e. Grad PLUS loans) and parents of dependent undergraduates (i.e. Parent PLUS loans) feature no borrowing limits. However, they also have higher interest rates.

How to Select Private Student Loans

You will need to sum up all the federal aid and family contributions to assess how much they will help you pay for college. In situations where the sum of these amounts is unable to cover the cost of college completely, you’ll need to take out a private student loan to cover the gap. For computing this gap, consider using the loan calculators provided on this website. This calculator will help you determine how much you need and what your repayment plan will look like.

Because student borrowers typically lack a credit history, they might need to apply for a loan with a co-signer. So, if you have a co-signer with good credit, you will enhance the chances of having the lenders approve your loan. At the same time, you might benefit from lower interest rates too. Before selecting any private lender, always compare the following aspects from several lenders:

  • Interest rates
  • Terms of the loan
  • Repayment options i.e. whether you can repay loans while you’re in school
  • Fees i.e. origination fees and,
  • The total number of monthly payments and the amount payable (the sum of these constitutes the total cost of the loan)

By this time, you would have found the best private loan to fill the gap for paying for college. While you might be new to the world of finance, being aware of your rights and obligations is always worthwhile. Oftentimes, this enables you to capitalize on the best loan available. At the same time, it minimizes the risks of receiving any unpleasant shocks in the future.