With the high costs of higher education, one of the most important decisions you’ll make in planning for college is how to pay for school. You can borrow the money you need, but there are several different types of student loans to choose from — each of which comes with several pros and cons.
Federal student loans are usually the first option to consider due to their low fixed interest rates and the consumer protections they provide. However, private student loans and refinance loans may also be good options: Both types are offered through private student lenders and come with competitive rates of their own, potentially even lower than the rates on federal loans.
Types of federal student loans
While there are many ways to pay for college, federal student loans are one of the most common. Not only do these loans offer flexible payment options, but they can also feature reasonable interest rates.
Under the Direct Loan Program, there are a few main types of loans still available to students.
Direct Subsidized Loans vs. Direct Unsubsidized Loans
Direct Subsidized Loans are available to undergraduate students who have demonstrated financial need. These loans do not accrue interest while the borrower is in school, nor during the six-month grace period or period of deferment afterward.
On the other hand, Direct Unsubsidized Loans are available to undergraduate, graduate and professional students. Borrowers do not need to demonstrate financial need, so anyone can qualify, but these loans do accrue interest immediately. This means that you’ll be gathering interest during school, after you graduate and during periods of deferment.
Direct PLUS Loans
Direct PLUS Loans are available to graduate or professional students and/or parents of dependent undergraduate students to help pay for education expenses in the event that other sources of financial aid fall short. Direct PLUS loans (aka graduate PLUS loans and parent PLUS loans) carry higher interest rates and loan origination fees than Direct Subsidized and Unsubsidized Loans.
Unlike other student loans, parent PLUS loans are taken out by parents directly. While students can make payments themselves, their parents will still be legally and financially responsible for repaying the full balance of parent PLUS loans.
Types of private student loans
Popular private student lenders include Sallie Mae, Discover and Citizens Bank, but there are dozens of additional private student loan companies that want to compete for your business. They do this by offering various repayment terms, incentives and consolidation options. Private student loans can also come with incredibly low interest rates for qualified borrowers with good or excellent credit, and you can typically choose a repayment plan that suits your budget and your goals.
Unlike federal student loans, which only offer fixed rates, private student loans can have fixed or variable interest rates. If you opt for a private loan with a variable rate, your rate will change over time — which means that you may end up paying far less than you would with a federal loan, but you might also get hit with an unexpected rate hike.
Be sure and compare all types of loans before you make a decision on federal or private loans. It’s generally best to see if you qualify for federal aid first and fill in the gaps with private lenders. If you do go with a private lender, make sure to shop around to compare rates and terms.
Types of student loan refinancing
If you have student loans already but you want to refinance in order to secure a lower interest rate or tweak your repayment timeline, you do have some options.
Refinancing federal student loans
Direct Consolidation Loans allow you to combine all of your eligible federal student loans into one new loan with a single loan servicer. The interest rate for the new single loan is a fixed rate and is determined by the weighted average of the interest rates on all of the loans being consolidated. In other words, you won’t save money on interest if you use a Direct Consolidation Loan, but you will gain the benefit of having to make only one payment instead of several each month.
While you also may be able to extend your repayment period with a Direct Consolidation Loan, consider the drawbacks before going this route. Your monthly payments will lower as a result of the longer repayment timeline, but you’ll spend a lot longer repaying your loans and your total interest charges will increase dramatically.
Refinancing with a private lender
Refinancing with a private lender is an option for refinancing both federal loans and private student loans. Just remember that you’ll lose out on some federal protections when you refinance federal loans with a private lender, including access to income-driven repayment plans and protections like deferment and forbearance.
With that being said, refinancing with a private lender can be advantageous. You can qualify for a competitive interest rate if you have good or excellent credit or a co-signer who does, and you can often choose a repayment plan and monthly payment that fits with your lifestyle and goals.
If you decide to refinance your student loans with a private lender, you can also consolidate all of the loans you have into one new one. This can help you save money on interest and simplify your finances, since you’ll have only one payment to make.
How to apply for federal or private student loans
Keep in mind that many students take out a combination of federal student loans and private student loans by the time they finish school. Often, this involves maximizing federal student loan options as much as possible while using private student loans to fill in the gaps or refinancing into a new loan with better rates and terms later on.
Application process for a federal student loan
To apply for federal student loans and other types of financial aid, you have to fill out the Free Application for Federal Student Aid (FAFSA). Completing the FAFSA will put you up for consideration for federal student loans. Furthermore, students who complete the FAFSA are also considered for federal and state aid, such as the Pell Grant, work-study and even school-sponsored scholarships.
Students and their parents (if the student is a dependent) will need to create a Federal Student Aid ID in order to access and electronically sign the FAFSA. To complete the FAFSA, students must have access to the following information:
- Identification information for themselves and parents (if dependents), including Social Security number, driver’s license and alien registration numbers (if not a U.S. citizen).
- Bank statements.
- Federal tax forms with W-2s.
- Records of investments, assets (excluding the family home) and untaxed income.
When it comes to providing tax and financial information, it’s important to remember that you must provide the information from two years prior to your school year. For example, if you are filling out the FAFSA for the 2020-21 school year, you will need to report information from 2018.
Students must also complete the FAFSA for each year they plan to enroll in school. This step is important, since financial information can change over time and it’s possible that your loan options or available aid can increase over the years you’re in school.
How to apply for a private student loan
If you plan to apply for a private student loan, you will not need to fill out a FAFSA form. Instead, you’ll choose among the top private student loan companies to find the best fit.
As you look for the best private student loan, here are the steps you need to take:
- Compare lenders’ rates and terms. Spend some time comparing lenders based on the rates and terms they offer qualified borrowers.
- See if you can “check your rate.” Some companies let you check your interest rate without a hard inquiry on your credit report. Checking your rate can help you get an idea of whether you can qualify for the loan amount you want and a reasonable interest rate.
- Fill out a loan application online. Once you settle on a lender, you can apply for your loan through a standard online loan application. Information you’ll need to provide includes the level of school you’re completing (undergraduate or graduate), your school name, your estimated annual income, the amount you want to borrow, your Social Security number and your contact information.
- Receive your loan funds. Once you’re approved for your private student loan, your funds will typically be disbursed to your school to cover tuition, room and board and other expenses. Remaining loan funds are typically sent to you, the borrower, in some way so that you can cover additional costs of higher education, like books or living expenses.
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