Making Sense of Student Loans Options

Nov 02, 2018
Student loans

With the staggering costs of higher education today, student loans are a viable way to bridge the gap between these expenses and what a student/family can contribute themselves along with any grants, scholarships or other forms of financial aid they receive. As important an investment as higher education can be, your financial life will be much easier to manage if you make informed decisions now that can impact you for years to come. To help you get a handle on the various student loan options available, here’s an overview of what you need to know:

Explore all practical opportunities for free money first: Whether you need money for attending college or pursuing a graduate program, your best course of action is to first maximize all practical options for financial aid that do not have to be paid back. These include scholarships, grants, fellowships, any contributions from employers, etc. If you’re a graduate student, be sure to check out “6 Steps for Getting Free Money for Grad School” from U.S. News & World Report to make sure you’ve left no stone unturned. High school seniors and undergraduate students may want to peruse our Oct. 28 blog article “Exploring the Best Options for College Financial Aid” for tips on optimizing free money for college.

Don’t skip the FAFSA for federal loans, even if your family earns a lot of money: As The Simple Dollar points out, the federal government does not have an income cutoff for financial aid. Factors in addition to income and assets are taken into account, including family size, when your parents will retire, whether you have other siblings in college, tuition costs at your school and more. Even if you don’t qualify for need-based federal assistance in the forms of grants or work-study programs, completing the FAFSA (Free Application for Federal Student Aid) will enable you to gain access to federal subsidized or unsubsidized loans. In most cases, federal loans are far preferable to private loans since they offer low-interest, fixed-rates that can save you thousands of dollars over time. Moreover, they also provide better overall protections and benefits for students. Just a few of these include more flexible repayment schedules, consolidation options and loan forgiveness for certain career choices. You can find what you need to know about “10 Student Loan Forgiveness, Cancellation and Discharge Programs” at NerdWallet here.

The three basic types of federal student loans: Essentially, student loans you can receive from the federal government fall into these categories: Direct Subsidized Loans, Direct Unsubsidized Loans and Direct PLUS Loans.

Direct Subsidized Loans: Awarded to undergraduate students with demonstrated financial need, Direct Subsidized Loans loans cover a wide variety of expenses in addition to tuition and fees, such as room and board, books and supplies, transportation and miscellaneous personal expenses. Your school determines the amount you can borrow, which may not exceed your financial need. If you obtain a subsidized loan, the government makes the interest payments while you attend school at least half time.

Direct Unsubsidized Loans: If you don’t qualify for need-based aid from the federal government, filling out the FAFSA will still allow you to gain access to Direct Unsubsidized Loans from the government. Available to both undergraduate and graduate students, these loans can also cover a wide range of living and school-related expenses in addition to tuition and fees. As with a Direct Subsidized Loan, there is no credit check required to obtain these loans, and your school determines the amount you can borrow based on your cost of attendance and your total financial aid package. However, you are responsible for paying the interest during all periods of the loan, including while you are attending school.

Direct PLUS Loans:  These types of federal loans can help pay for education expenses not covered by other forms of financial aid. The PLUS (Parent Loan for Undergraduate Students) is unsubsidized, and actually available to graduate or professional students in addition to parents of dependent undergraduate students. Although they offer low interest rates, they require a credit check. As the Federal Student Aid website explains, the maximum available is “the cost of attendance (determined by the school), less any other financial assistance received.”

When does it make sense to look into private loans? Federal loans are generally the best first option to turn to when seeking financial assistance outside of scholarships, grants and work-study programs. However, there are certain situations that may merit taking out a private loan to supplement educational costs. This may be that you have exhausted all sources of federal funds available to you or if you need the funds right away (they are dispersed after the loan is approved). It could also be that asking your parents to take out a Direct Plus Loan on your behalf is not an option, but that you know another person with outstanding credit that is willing to co-sign for you and can get you a very low rate.

Regardless of your reasons for looking into private lenders, be sure to shop around for the best rates, and make sure you fully understand their repayment terms. Certainly, your credit history, or your co-signer’s credit history, will play a major role in determining what interest rates you’ll be eligible to receive. Also keep in mind that although a private lender may offer a low initial interest rate, there is a strong likelihood that this rate will rise significantly if you obtain a loan with a variable rate (many of them are).

Take advantage of online tools to streamline your search for private loans: For an excellent online tool that enable you to compare loans and rates from different lenders in just a few minutes, The Simple Dollar has suggested SimpleTuition.com. Just be sure to check out “Five Signs You’re Dealing With A Student Loan Scam” from Forbes before applying for private loans.

Also, don’t forget that now is a great time to apply for a scholarship from SFPCU! Each year, SFPCU offers four $1,000 college scholarships to members who demonstrate outstanding academic performance and contribute to the improvement of their community. Apply before December 31, 2018, to be considered for one of our 2019 scholarship awards. Details and eligibility requirements at https://www.sfpcu.org/membership/scholarships.

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