Higher education can be expensive. The average cost of a year at college for 2019-2020 ranges from over $10,000 for in-state public universities to $36,801 for private colleges, with some highly ranked private colleges charging over $50,000 a year. Most students and their families can’t pay this much, and many turn to student loans to cover part or all of the cost of education.
There are several types of student loans. If you need to borrow to fund your education, it’s important to know what kinds of loans are available and what the requirements and payment options are for each one.
Should You Borrow for College?
As with most loans, the first question you should ask is whether it’s necessary to borrow at all. It may seem impossible to go to college without borrowing, but there are alternatives worth considering.
- Look into all financial aid and scholarship options. You don’t have to be a genius or poor to qualify for a scholarship or grant. There’s a wide range of financial assistance available and you may qualify for programs you don’t even know about.
- Consider less expensive schools. Try a state university instead of a private college or consider taking two years at a community college and then transferring to a regular college.
- Work part-time. Part-time work might not make a dent in your costs if you’re going to Harvard, but it can cover a substantial portion of the cost of community college or a state college.
- Earn college credits in high school. Advanced placement classes in high school can get you college credits without paying any tuition at all. Take advantage of that opportunity.
- Consider learning a trade. College can be a great choice, but it isn’t the right choice for everyone. Trade schools are a less expensive option and many skilled trades are in high demand and offer excellent employment and salary prospects.
- Look for employers that pay for education. 20 percent of graduate students and 6 percent of undergraduates are receiving tuition assistance from their employers. Look for companies in your area that offer these benefits. The US military also offers a range of tuition assistance programs covering up to 100% of the cost of college.
These options may not work for everyone, but it can’t hurt to consider them.
Federal Student Loans
If you are not offered financial aid or the aid you are offered is not enough to cover your expenses, you may have to consider student loans. Loans from the federal government are the first place to look for a student loan.
There are three types of federal student loans:
- Direct subsidized loans are restricted to students who can demonstrate financial need.
- Direct unsubsidized loans are not based on financial need. Any student can apply for these loans.
- PLUS loans are made to graduate or professional students or parents of undergraduates to pay for expenses that are not included in other financial aid. A credit check is required to qualify for PLUS loans.
Federal student loans offer substantial advantages over private loans:
- Lower rates and fees. The interest rate on a federal student loan is fixed and is lower than that of most private loans.
- No credit checks or co-signers needed. Federal direct unsubsidized and subsidized student loans do not have a minimum credit requirement.
- Delayed repayment. You may not have to start making payments on your loan until you finish college.
- Forgiveness for some service-related employees. Teachers, law enforcement officers, and some other types of employees may be eligible for loan forgiveness.
- More options for pausing payments. Federal student loans offer generous forbearance and deferment options, along with income-based repayment plans that limit your payment to a percentage of your income. The government may even pay your interest if you’re in financial need.
- More time before default. Many private lenders consider you in default after one missed payment. The federal government will give you up to three months and offers you numerous options for keeping your loan in good standing.
- Cancellation for disability or death. It’s not something anyone wants to think about, but federal student loans are automatically discharged if you die or are permanently disabled. PLUS loans are discharged if the parent dies.
You can apply for federal student loans through your school’s financial aid office. You will have to sign a Master Promissory Note and take a short course on loan management.
There are limits to how much you can borrow from federal student loan programs in any given year and over the course of your education. These limits vary for different types of students. For details see this list of federal student loan limits provided by the US Department of Education.
Private Student Loans
If you still don’t have enough to cover your educational costs, consider private loans as a last option. Student loans are available from many banks, credit unions, and online lenders.
Private student loans will usually require good credit and an acceptable debt-to-income ratio. Since many students don’t have enough information on file to have a credit rating, their parents often have to serve as cosigners.
Shop around for private loans. Always consult multiple lenders and always read the terms carefully. Your school’s financial aid office may be able to advise you on potential lenders.
Be sure to check the loan’s terms and provisions carefully. Some loans require that payments start immediately, others may allow you to begin paying after you graduate. Some may have fixed or variable interest rates. Many will have stricter requirements for deferment or forbearance than federal student loans.
Don’t Forget the FAFSA
The Free Application for Federal Student Aid, or FAFSA, is the logical starting point in your search for education funding. The FAFSA takes around 30 minutes to complete. As it says in the name, it’s free.
The FAFSA is the first step to getting federal student aid and to getting many school-specific scholarships. Many students don’t complete the FAFSA, which denies them many aid and loan opportunities.
The federal government will automatically forward your FAFSA to schools that accept you. The school’s financial aid office will then send a letter explaining your options and the programs that you may wish to consider.
Financial aid is common. In the 2017-2018 school year, 86% of enrolled students received some form of financial aid. The FAFSA is the first step toward receiving both government aid and many forms of private assistance.
Signing for a student loan can be easy but paying it off may not be. Many students graduate with a heavy loan burden and some take decades to pay off their student loans. Student loans can be a significant financial burden after you graduate, so it’s important to consider alternatives. If you have to borrow, borrow as little as possible and choose the loans with the best payment options.