Part of the college financial aid process is determining whether or not to take out student loans, and how much money to borrow. All student loans are not created equally, so be very sure of what you receive. Students and parents should always turn to federal student loans first. You will usually see them listed as part of the financial aid award letter, while you will need to research and obtain private student loans on your own.
Federal Direct Subsidized Loans have slightly better payment terms because the Department of Education pays the interest while the student is in school and meets the loan’s criteria. You must be able to demonstrate financial need to qualify for subsidized loans. The student is responsible for paying interest on Direct Unsubsidized Loans while he or she is in school, but this amount may be deferred and included into payments when the student graduates. There is no requirement to demonstrate financial need to receive an unsubsidized loan. Federal Perkins Loans are low-interest federal student loans for undergraduate and graduate students with exceptional financial need. PLUS loans are available at a fixed interest rate to parents of dependent undergraduate students, as well as graduate or professional degree students. There are also certain loan fees which are charged for both direct and PLUS loans.
If you still need additional funds to cover college expenses, the next step is to research private student loans. Lenders have a great deal of latitude in setting up their student loan program. You will need to research fees, interest rates, variable versus fixed interest, repayment options, prepayment penalty fees, and consolidation opportunities to make sure you receive the best option. Here are the major differences between federal and private student loans:
• Repayment: With federal student loans, repayment does not begin until after you graduate or leave school. Some private lenders require payment to begin immediately.
• Interest Rate: Interest rates may be fixed or variable. Federal student loans offer fixed interest rates, so you know what you are paying for the entire term of your loan. Private student loans may offer fixed or variable rates, which may increase over time.
• Interest Accrual: You must understand when interest begins accruing on your loans. It may be deferred until payment on the principal is due, but that can add up to a substantial amount of money, depending on your interest rate.
• Credit Check: Most federal loans do not require a credit history. Private student loans do, which may result in a higher interest rate or stricter repayment terms. Student borrowers may also need a co-signer on private student loans.
• Consolidation: Federal student loans may be combined into a Direct Consolidation Loan, which may make it easier to handle repayment. Private student loans will vary on the ability to be consolidated.
There are many things to take into consideration before agreeing to any type of student loan. Make sure you understand the risks, differences, and benefits before you sign.