Back-to-school is an interesting time of year. New high school seniors are learning about financial aid and getting ready to file the FAFSA as soon as possible after it becomes available online October 1. But, for the new college freshmen and other returning college students, it might be a time when they are faced with a financial shortfall. These students might be performing their final calculations regarding what their exact college costs are, and how much financial aid they actually received.
They could suddenly realize there are some expenses they did not take into consideration, or they might have found out that costs for the next semester will be more than they anticipated. That is when the idea of student loans comes into play. We have often said here that it is important to be careful of taking on too much student loan debt, but some debt might be necessary to help bridge the gap between how much money is needed and how much you have.
The first thing to remember about borrowing money is there are different types of loans available. You must study the available loans, and make smart money decisions when borrowing money. Informed choices now could save you thousands of dollars down the road when it comes time to repay your loans. The two categories of student loans are federal and private. You always want to exhaust your options in federal student loans first before turning to the private lending market.
Who Qualifies For Federal Student Loans?
The financial aid award letter from your college will inform you of which federal student loans you are eligible to receive. Be aware that you do not have to borrow all of the money that is offered – only borrow the amount that you really need. These federal loans come in several versions:
• Direct Subsidized Loans: Available to eligible undergraduate students who demonstrate financial need, to help cover the costs of higher education at a career school or college. The maximum amount you can borrow each year in Direct Subsidized Loans and Direct Unsubsidized Loans ranges from $5,500 to $12,500 per year, depending on what year you are in school and your dependency status.
• Direct Unsubsidized Loans: Available to eligible undergraduate, graduate, and professional students, but eligibility is not based on financial need. If you are a graduate or professional student, you can borrow up to $20,500 each year in Direct Unsubsidized Loans. Direct PLUS Loans can also be used for the remainder of your college costs not covered by other financial aid.
• Direct PLUS Loans: Available to parents of dependent undergraduate students and graduate or professional students to help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. Borrowers who have a negative credit history must meet additional requirements to qualify. If you are a parent of a dependent undergraduate student, you can receive a Direct PLUS Loan for the remainder of your child’s college costs not covered by other financial aid.
Who Qualifies for Private Student Loans?
If federal student loans are not sufficient to meet your needs, you can turn to the private student loan market. Here the loans can vary from lender to lender, so you must use a great deal more diligence. Private student loans are made available from a lender such as a bank, credit union, state agency, or a school. Some items to compare include:
• You may be required to provide a credit history for private student loans.
• If your credit history is weak, you may need to find a co-signer for your loan.
• Your interest rate may be fixed or variable.
• Payments may start while you are still in school.
• Interest may accrue for the entire time you are in college.
• Repayment options may be less flexible than those available with federal student loans.
To receive federal student loans, you must complete the FAFSA. For private student loans, you can research opportunities online or speak to your local bank and credit union representatives to find the best available options.