Getting accepted into the college of your choice is only the beginning of your higher education journey. With the cost of an education increasing year after year, it is no wonder that many students and their parents struggle to find ways to afford the associated expenses. Check out this informative video about applying for a student loan while studying abroad.
While it is nice to receive scholarships and grants for college, realistically not everyone can qualify for them. Fortunately for us, applying for students loans is a great way to bridge this financial gap to pay for tuition and other college-related costs.
Federal and Private Student Loans Overview
Student loans come in two varieties including private student loans and federal student loans. Both types of loans require the borrower to repay them upon graduation but there is a 6 month grace period. The biggest difference between the two is that federal loans are partially paid by the government. Interest rates on government school loans are typically half the rate compared to private loans and are capped. This can certainly add up to a lot of money when borrowers typically take an average of 20 years to repay the full amount.
In addition, the government also pays the interest on federal loans while the borrower is attending school. This is not the case for private student loans. While students do not have pay while they are in school, interest accrues every day. Keep in mind, lenders are for-profit organizations while the government is lending to help out students. Their motivations are very different hence the big difference.
Apply for Federal Student Loans
Before applying for these loans, students need to make sure they qualify for them. Federal student loans are part of a financial aid package for lower-income students. It is a good idea to apply ahead of time and not wait until the last minute to get this done since funds are limited. Just fill out the Free Application for Federal Student Aid (FAFSA).
Requirements include the student getting into an accredited college or university an show need. Upon review, the government will determine how much a student’s family can afford based on family income and other assets. Those that are determined to not have enough money to pay for college are offered a mix of grants, loans, and work-study to make up for the shortfall. The amount of aid received also depends on student status.
Full-time students will receive more money since it costs more to take a full class load. For government student loans, borrowers will receive a Stafford Loan and Perkins Loan. The former has a yearly maximum limit of just over $21,500. The latter has a yearly maximum borrowing limit of $5,900. The money will be disbursed through your college’s financial aid office. This money can be used for tuition, rent, board, or any other college expense. Check out as well this post on how to write a research paper. This will also benefit you application writing.
Apply for Private Student Loans
Private student loans come in two flavors: school channel loans and direct to consumer loans. The former is a loan in which the school works with the lender to get the loan for you. The interest rates are lower but will take longer to process. Direct to consumer loans are not school certified. Students and their cosigner simply submit enrollment documents to the lender. Although the interest rate is higher, funds are disbursed quickly, usually within days, directly to the student.
Applying for private loans should be a place of last resort. As we previously mentioned, these loans have a much higher interest rate and they accumulate interest even when students are in school. Also, interest rates are variable tied to the Libor. This can be good if interest rates fall, but bad if they rise. Moreover, there are origination fees. a one time fee based on a percentage of the loan amount is attached to this type of loan.
Private student loans do not have limits. However, applying for one requires the borrower to have an acceptable credit history. Those that don’t and want to apply for student loans with bad credit need to get a cosigner to vouch for you. Doing so will hold the cosigner responsible for the loan in the event that the borrower cannot repay the loan.
Tips to Save Borrowers Money
- Up to $2,500 can be deducted on your tax return according to the Tax Relief Act. The interest portion of your total yearly payments is tax deductible for those that make less than $70,000 per year. However, this deduction begins to phase out when a borrower makes $55,000 up to $70,000.
- In a declining interest rate environment, it makes sense to consolidate your student loans. There are two benefits to doing this. Borrowers will only have to make one payment a month to one lender instead of multiple lenders. In addition, one can capture lower interest rates. That’s the biggest reason to do it, to save money.
- Sign up for auto payment to prevent any late payments. Lenders usually give an incentive to borrowers for signing up by giving them a .25% interest rate deduction.