With the rising price of tuition, fees, room and board at four-year public colleges and private nonprofit institutions, more students in all income brackets have been taking out loans. The options are pretty straightforward.
Students who qualify can obtain loans for their college education through two main routes: the federal government and private lending institutions that offer this type of loan.
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Prioritizing a Plan
When creating a plan to fund college education, it can make good sense to first explore any avenues for free money in the form of grants and scholarships.
By taking a look at the remaining balance after any free money has been found, exploring federal loans can be a smart next step. They come with income-based repayment options and the ability to request loan forgiveness under some circumstances. There are also work-study programs that can help students earn money while attending college.
If all needs are not covered, then there are private student loans to consider, along with Direct PLUS loans that parents can apply for to get funds for their children.
After that, some people may seek out personal loans to cover living expenses while in school and/or emergency loans from the college.
Here are more specifics about these options.
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Where to Get a Federal Student Loan
When the funding for college comes from the federal government, then—as the name indicates—that’s considered a federal student loan. To obtain any kind of federal student loan, a student must first fill out the Free Application for Federal Student Aid, commonly called the FAFSA. Here are tips on how to fill out the FAFSA.
After filling out this form, a student will have insights into what federal funding is available for them, along with work-study options. More specifically, each school that a student applies to can send a financial aid offer letter, which includes information about how to apply for student loans that they qualify for.
Two broad types of federal loans are:
- Direct subsidized loans: These are for undergraduates with financial need
- Direct unsubsidized loans: These are available for undergraduate students, as well as graduate and professional ones. They do not need to demonstrate financial need.
A key difference between the two types involves the interest on the loan. With a subsidized loan, the U.S. Department of Education pays the interest when a qualifying student is attending school at least half time, as well as during a six-month grace period afterward.
This can also apply if the loan goes into deferment, meaning when loan payments are postponed. With an unsubsidized loan, the student is responsible for paying the interest.
After following instructions in the financial aid offer letter, the student will need to sign a Master Promissory Note, which describes repayment terms.
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Where to Get a Private Student Loan
A variety of financial institutions offer private student loans and have their own criteria for qualification. Some allow students to apply online and can give quick responses, while others go a more traditional route with in-person applications.
Private lenders will typically review a student’s income, plus that of any co-signer, along with credit histories and scores, and more to make lending decisions. A lender might grant a private student loan to someone whose credit isn’t stellar but charge a higher interest rate.
When applying for a private student loan, it’s important to understand the loan terms before signing the note. This includes the interest rate and whether the rate is fixed (staying the same over the life of the loan, with the principal and interest payments also staying the same) or variable. If a loan is variable, how much can the rate change? How often? What is the term of the loan?
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Private Loan Pros
Benefits of private student loans can include the following:
- They can bridge the gap between what is owed after federal student loans are applied to the balance and what is needed to attend college.
- Students can apply for them any time of the year, without the strict deadlines associated with federal loans.
- Borrowers may have more choices in interest rates and terms.
- The loans may not include origination fees or prepayment fees, although that isn’t universally true.
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Private Loan Cons
Potential cons can include these:
- It isn’t unusual for a private lender to require a co-signer because college students often don’t have enough income to qualify or have established a good enough credit score to get the loan on their own.
- Students who are considered a higher credit risk may pay more in interest.
- Private student loans don’t come with many of the benefits associated with federal loans, such as forgiveness programs and income-based repayment plans.
- Students may borrow more than they can ultimately afford, and these loans are typically not dischargeable in bankruptcy proceedings.
Check out this Guide to Private Student Loans for more information on funding your education through a financial lender.
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Direct PLUS Loans and More
When asking Where is the best place to get a student loan? also consider the Direct PLUS option, in which parents can apply for federal funding to help their children attend college.
Eligibility for a PLUS loan isn’t based on financial need, but credit is checked. If applicants have a credit history that’s considered “adverse,” they “must meet additional requirements to qualify.”
So, what does “adverse” mean? According to the Federal Student Aid office, this can include:
- Having accounts that, in total, have an outstanding balance of more than $2,085 and are at least 90 days delinquent.
- A default or a bankruptcy discharge during the previous five years.
- Involvement in a foreclosure, repossession, or tax lien situation in the previous five years
- Write-off of federal student loan debt or wage garnishment during the past five years.
Qualifying parents of a dependent undergraduate student can receive funding through this loan program to cover education-related costs that are not covered by other financial aid.
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Paying for Living Expenses
It’s also possible to apply for personal loans from financial institutions to cover living expenses during college or to address an emergency. There are downsides to this, though, including:
- Interest rates will likely be higher than student loans, along with shorter payoff periods (which means principal and interest payments can be higher).
- There isn’t typically a grace period, which means repayment starts right away.
- These loans don’t come with deferments or forbearance, as can be available through federal student loans.
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In an emergency, a student might want to reach out to the college financial aid center to see if the school offers emergency loans for those in need. These loans would not typically be large, perhaps $1,000 to $1,500, but might be enough to address a dire situation.
Each college has its own guidelines, so check them out carefully. Some charge interest; others may not. Some may charge a service fee; others may not. As with personal loans, repayment may start immediately, so factor that into budget planning.
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SoFi Private Student Loans
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