Getting Financial Aid Part 5: Student Loans
Nowadays it’s unlikely that just grants or scholarships will cover the cost of your college education. One of the most common ways to make up the difference is student loans. All student loans fall into two basic categories:
• Federal loans
These are loans issued by the U.S. government. Common examples are Direct loans, Stafford loans, Perkins loans, and PLUS loans (available only to a student’s parents or to graduate students).
• Private loans
These are loans issued by some other organization such as credit unions, your own school, or a non-profit or other agency.
All federal student loans are guaranteed by the U.S. Department of Education and are issued independently of your credit score and history. They do, however, come with fixed limits per year. These limits depend on your grade level (for example, freshman versus senior) and also if you’re in an undergraduate or graduate program. Additionally, there is a cap on the total amount of student loans you can have outstanding.
Federal student loans can be broken down into two basic types:
These are loans issued based on your financial need (how this is determined can depend on your school). Interest rates will be lower than for unsubsidized loans and the federal government will pay the interest while you are still a student.
Even if you can’t demonstrate financial need, you are still eligible for an unsubsidized loan. While interest accrues on your loan as a student, it does not need to be repaid until after graduation.
In all cases you do not have to start repaying your federal student loans until six months after you stop being a student (because you either graduated or left school). More detailed information about federal student loans is available from the Department of Education’s Federal Student Aid office.
Since the total amount of federal student loans is capped at a level that is not usually enough for a student’s entire college education, private loans are available to make up the difference. However, since these are essentially personal loans, the terms and fees can vary widely depending on your credit history and the institution your borrow from. Also, unlike federal student loans, private student loans often have variable interest rates.
Private student loans break down into two general types:
• School-channel loans
These loans are approved by your school at a typically lower interest rate than direct-to-consumer loans. Your school receives the money directly to pay your tuition, fees, etc. They generally take longer to finalize than direct-to-consumer loans and your school can set the maximum limit.
• Direct-to-consumer loans
These are private loans directly to you (or your parents) and don’t involve your school at all. While interest rates will probably be higher than school-channel loans, they can be processed more quickly, making money available almost right away. The maximum allowable limit can be negotiated with your lender.
For private student loans, interest rates, fees, and how soon after graduation you have to start repayment can vary widely from lender to lender. Service levels may also vary even over the course of the same loan — your point of contact is often a loan servicer, who may change depending on their contract with your lender. Your loan can also be consolidated with other loans and sold on the market, so who ends up holding your loan may not be your original lender.
There are a number of websites available to compare different private student loans, including SimpleTuition and PrivateStudentLoans.com. FinAid also supplies a site that lists marketplaces that are specific to some individual states as well as additional caveats and information.
If you already have student loans (federal, private, or combined) or you are trying to be proactive, you can find some basic advice and information about repayment options at the Consumer Financial Protection Bureau.