Post By: Guest Contributor, The Penniless Student
With the cost of a college education rapidly increasing, more and more students are finding that they are unable to cover the entire cost of a college degree with savings, scholarships, and grants. Student loans are often necessary to cover the gap, and the statistics for student loan debt are telling:
- 62% of undergraduate students from public four-year colleges graduate with student loan debt
- 72% of undergraduate students from private non-profit four-year colleges graduate with student loan debt
Since the majority of students will need to seek student loans as a form of college financing, it is important to understand the student loan options available in order to avoid graduating with a high-interest debt that will follow you for years to come.
Understanding the options available for college loans should begin with the types of loans available:
- Federal Loans – Federal student loans should be the first choice when seeking student loans. These types of loans are made directly by the government, and the interest rate on these loans is set by Congress. Since the fixed interest rate of federal loans is capped, it is almost always lower than the interest rate on private student loans. Additionally, federal loans allow for more repayment options. These loans rely on the FAFSA application to show financial need and as the first part of the application process.
- Perkins Loans – Federal Perkins loans are low-interest loans that are reserved for college students that show the greatest financial need. Certain borrowers (those who pursue service employment in certain teaching, military, or public roles) are eligible to have all or part of their loans canceled.
- Subsidized Stafford Loans – This type of federal student loan is a direct loan from the government and is for students that demonstrate financial need through the FAFSA. The “subsidized” part of the name refers to the interest on the loan. Students are not charged interest on this type of loan while they or are school or during certain deferment and grace periods. The maximum amount of these subsidized loans is determined by the government and the student’s year in school (for 2010, $3,500 the first year of school, $4,500 the second year, and $5,500 for the third year and beyond with a lifetime maximum Stafford loan debt of $23,000).
- Unsubsidized Stafford Loans – Like subsidized Stafford loans, these loans are received directly from the federal government. The differences are that unsubsidized loans are not dependent on demonstrating financial need and interest is charged on these loans while the student is in school. Total loan amounts for the combination of subsidized and unsubsidized Stafford loans cannot exceed $5,500 the first year of school, $6,500 the second year, and $7,500 for the third year and beyond. The total amount that can be borrowed through the Stafford loan program is $31,000. Students can only borrow up to the cost of attendance of their chosen college minus any other financial aid received for each year.
- PLUS Loans – Federal PLUS loans are available to graduate/professional students and qualified parents of dependent students. These loans are not as favorable as Perkins and Stafford loans, but they still usually provide more desirable terms than private loans and offer a fixed interest rate. PLUS loans can cover up to the total cost of education (minus other financial aid received) as determined by each school. This includes tuition and fees as well as an allowance for room and board.
- Private or Alternative Student Loans – Once the federal options for student loans have been exhausted, private loans are the next choice. These student loans usually carry terms that are less favorable than other forms of financial aid, and the terms can vary widely between each provider. This makes private loans the least desirable choice for student financing, but they are often necessary in order to fill the gap between the real cost of attending college and the available financial aid.
- Student Private Loans – The terms of private loans for college expenses can vary, so the first step is to thoroughly understand the terms and student loan options available. The interest rates on these types of loans are usually variable, which usually means they are tied to an index such as LIBOR or PRIME. This feature makes these loans more unpredictable: you cannot be sure exactly what your future payments will be. Be sure to shop around for the best rates and, if possible, get a cosigner with excellent credit to get the best possible rate.
- Home Equity Loans or HELOC – Home Equity Loans or Home Equity Lines Of Credit (HELOC) are a possible option if a student’s parents are financially supporting them through college. These loans/lines of credit usually have better interest rates than private student loans, lower fees than private loans, interest that is usually tax deductible (for home equity loans), and more flexible repayment options (especially for HELOCs). As with all types of private college financing, be sure you completely understand the terms, interest, and fees of these loans before pursuing this option.
With the cost of a college education constantly increasing, loans will become more and more necessary for more and more people. Understanding the options available for student loans is important to your future financial health, so be sure to research all of the available options before borrowing money and increasing your debt.
