A beginner's guide for securing the necessary loans to complete your degree.
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Unless their parents have saved a lot of money or earn big salaries, most students nowadays have to borrow money to pay for college. It's rare for students to work their way through college and earn enough to cover all their expenses while also attending classes. Because of this, student loans and debt have become more common. Here's what you should know about applying for them.
KEY TAKEAWAYS
• To apply for federal college loans, students and parents must complete a form called the Free Application for Federal Student Aid, or FAFSA.
• Federal student loans have two main types: subsidized and unsubsidized. Subsidized loans are cheaper if you meet the requirements.
• Other places to get loans include federal PLUS loans for parents and loans from banks and other lenders called private loans.
Step 1: Fill Out the FAFSA
The first thing to do when applying for student loans is to complete the government's Free Application for Federal Student Aid (FAFSA). This form asks about the student's and parents' income, investments, and other important details. Using this information, the FAFSA calculates your Student Aid Index (SAI), previously called Expected Family Contribution (EFC). This is the amount of money the government thinks you can afford to pay for college for the upcoming school year from your own finances.
You can do the FAFSA online on the Federal Student Aid website.To save time, gather all your account details before you begin. You need to fill out the FAFSA not just once but every year to keep getting aid.
Step 2: Compare Your Financial Aid Offers
The colleges you apply to will use your FAFSA info to decide how much aid you can get. They calculate your need by taking away your EFC from their cost of attendance (COA). This COA includes tuition, fees, room and board, and some other costs. You can usually find it on the college websites.
To cover the difference between your EFC and their COA, colleges create an aid package. This package might have federal Pell Grants and paid work-study, along with loans. Grants, unlike loans, don't have to be repaid, except in rare cases. They're for students with what the government sees as "exceptional financial need."
Award letters can vary between colleges, so it's vital to compare them directly. When it comes to loans, check how much each school offers and whether they are subsidized or unsubsidized.
Direct Subsidized student loans are for students with significant financial need, similar to grants. The perk of subsidized loans is that the U.S. Department of Education pays the interest while you're in school at least half-time and for the first six months after graduation.
Direct Unsubsidized loans are open to families regardless of their financial need, and the interest begins to accumulate right away.
Payments and interest on these loans were paused in 2020 due to the economic crisis. Payments will restart in October 2023, and interest will start building up again on September 1, 2023.
If you're eligible, a college might provide you with both subsidized and unsubsidized loans.
Federal loans offer several advantages compared to student loans from banks and other private lenders. They have low, fixed interest rates (unlike private loans, which often have variable rates) and provide various flexible repayment options.
However, there are limits on how much you can borrow. For instance, most first-year undergraduates can only borrow up to $5,500, with a maximum of $3,500 in subsidized loans. Additionally, there are total borrowing limits for your entire college education.
If you need to borrow more than that, one option is a federal direct PLUS Loan. PLUS loans are intended for the parents of undergraduates (as well as for professional and graduate students). PLUS loans have higher limits—up to the full cost of attendance minus any other aid the student is receiving—and are available regardless of need. However, the parent borrower must generally pass a credit check to prove their creditworthiness.
Step 3: Consider Private Student Loans
If you require more funds than federal student loans offer, another option is to apply for a private loan from a bank, credit union, or other financial institution.
Private loans are accessible regardless of financial need, and you apply for them using the forms provided by the financial institution, not the FAFSA. To qualify for a private loan, you'll need a good credit score or have someone with one, like a parent or relative, co-sign the loan.
If your credit isn't great, it can be tough to get student loans. Private lenders look at your income and credit history, and as a college student, you might not have much credit history, or it might not be good. But some lenders have student loan choices for people with bad credit.
Usually, private loans have higher interest rates compared to federal loans. Plus, these rates can change, so it's hard to know exactly how much you'll owe. Private loans don't offer the flexible repayment plans that federal loans do, and you can't consolidate them under the Federal Direct Consolidation Loan program. However, after you finish school, you can refinance your private loans, which might mean getting a lower interest rate.
Every college will tell you how much aid they're offering when they officially accept you. This is usually called an award letter. Along with federal aid, colleges might offer money from their own funds, like scholarships based on merit or athletics.
Step 4: Choose Your School
Deciding how much you'll need to borrow to attend different schools may not be the top priority when choosing a college, but it's really important. Graduating from college with a lot of debt—or worse, taking on debt and not finishing—can be a huge burden. It might affect your career and life choices for years. Also, think about the careers you're interested in when deciding how much to pay for college. A job with a high starting salary can help you pay back your loans and make it worth taking on more debt.
How Do You Borrow College Money Under Federal Loan Programs?
To get a federal loan, you have to fill out the Free Application for Federal Student Aid (FAFSA). It asks about the student's and parents' income, investments, and other important things. The FAFSA uses this info to figure out the Student Aid Index (SAI). That's what's used to decide how much help you can get.
What Are Some Advantages of Federal Loans Over Private?
Federal loans typically have low, fixed interest rates, while private loans often have rates that can change. Federal loans also offer different ways to pay back what you owe. Unlike federal loans, private loans aren't tied to how much money you need. To get a private loan, you might need to show that you can pay it back by having a good credit score. If you don't have much credit history or your score isn't good, you might need someone else to sign with you. Private loans can also let you borrow more money than federal loans.
What Are the Differences Between Direct Subsidized Loans and Direct Unsubsidized Loans?
Subsidized loans, like grants, are for students with a lot of financial need. The U.S. Department of Education pays the interest while you're in school at least half-time and for the first six months after you finish. On the other hand, unsubsidized loans are open to families no matter their need, and interest starts adding up right away.
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