Guest Post: Student Loans 101 - How to Navigate The Process Wisely

College costs keep rising every year and most students and parents can’t afford to pay all the expenses out of pocket. Federal, state, and private financial aid in the form of grants still leave a large gap in financing a college education. Most students will need to consider at least one loan to make up the shortfall. Choosing and using them wisely will impact their futures long after graduation day.

Students will need to fill out and file the Free Application For Federal Student Aid. This handy tool helps calculate college costs and how much the student may need to borrow.

Federal Student Loans

Perhaps the most familiar is the Federal Stafford Loan which has a fixed interest rate for undergraduate and graduate students who are taking classes at least half-time. Interest rates are as low as 4.5%. These loans can be used for college and living expenses.

In a nutshell, Direct Loans are administered directly by the U.S. Department of Education, not a bank. Federal Direct Loans are known as subsidized loans, meaning that interest doesn’t start accumulating before leaving school or graduation. Several repayment options are available and interest on a basic subsidized loan is 4.5%. For unsubsidized loans, meaning interest starts accruing as soon as the money is paid to the student, the interest rate is 6.8%.

Perkins Loans are geared toward those students who show the greatest financial need. These loans are administered by a student’s college or university, not a bank or government agency. Perkins Loan funds are awarded to each school in a lump sum amount at the beginning of the year. Once these funds are depleted, they’re gone until the next year. It’s important to apply to the campus financial aid office before this help is needed.

Parents can borrow directly from the federal government using a PLUS loan. Biological, adoptive, or step parents can qualify for a PLUS Loan if the student can be claimed as a dependent and is under the age of 24. There are a few exceptions.

State Student Loans

Each state has its own complement of student loan programs. The best way to determine which one is right is to go to the state’s student-loan website and compare rates and terms. In general, a state’s higher education department partners with private loan providers and loan guaranty organizations.

State loans have some advantages. They often offer lower interest rates, loan forgiveness for certain career paths, and programs tailored for specific degree programs.

The student’s home state is the first place to apply. After that, he or she may qualify for loans from the state in which the college or university is located.

Private Student Loans

Private student loans can save the day when federal and state funds don’t cover all expenses. They are very welcome during sudden emergencies such as textbooks depleting a student’s budget, a computer crash, or travel during the semester.

Private loan sources offer more flexibility than do government-backed loans. The funds can be requested when needs arise, not before the beginning of the semester. There is no needs-analysis and any student with good credit can apply for any amount.

While private loans sometimes offer a lower interest rate, students with a co-signer are more likely to be approved at this lower rate. The funding source is likely to be repaid and thus takes a smaller risk.

What Can Student Loans be Used For?

In general, federal, state, and private student loans can be used for tuition, room and board, supplies, lab fees, school-related travel, and other expenses the student encounters during the school year. Some state and private sources may have a few stipulations.

Co-signer or No Co-Signer?

As mentioned above, some borrowers can obtain lower interest rates if they have a parent or other creditworthy adult co-sign a loan with them. This is only an issue with a private loan. There is no such requirement for federal loans and most state loans.

Interest Rates

Private loans from banks or other lenders may come with either a fixed or variable interest rate. A fixed rate means the same percentage will be paid over the life of the loan. Variable-rate student loans have an interest rate that fluctuates as often as every three months and is tied to the wider credit market, often the federal prime lending rate.

Certified vs. Uncertified

A certified loan usually comes from a private lender such as a bank. The student is required to sign a promissory note pledging repayment of the loan after graduation or leaving school. Additionally, these are administered through the school’s financial aid office. An uncertified loan requires no such approval from an official and is paid directly to the borrower.

There are myriad options when it comes to student loans. So answering the question “What Loan Should I Get” is seldom straightforward. But by understanding each loan type, you can figure out a good starting point.