It’s no secret: college education is not really very affordable. This is exactly the reason why most students choose to make use of student loans to fund their education. This way, they’re sure that they can finish their studies, and just promise to pay the loan once they have graduated.
Student Loans can be used for a variety of things, including:
- Board and lodging
- Normal living expenses
- International programs
There are also instances when a student can ask their lender for extra money, especially in times of emergencies. However, this varies from lender to lender, so you have to make sure to talk to your lender properly.
Major Student Loan Categories
There are two main categories of student loans that college students can apply for. These are:
A Private Student Loan is something that is borrowed from private lenders and large banks. It’s easy to qualify for private loans, but what you have to keep in mind is that they have higher interest rates so they might be harder to pay off in time. Private loans also do not require you to answer FAFSA (which you’ll learn more about later), and also offer consigner options. Most private loans also do not have prepayment penalties, which could work for your benefit.
These are loans that are subsidized by the government. Typically, they are more complicated to pay than private loans, but what’s good is that you actually have a couple of years to save up because you’d only be required to pay once you’re done with college. In addition, some federal loans would also allow your parents to borrow and pay for you. There are many federal loans to choose from. You can learn more about them below.
Types of Federal Loans
This is the type of loan that most students prefer, as it is available for both undergraduate and graduate students. Interest Rates are also set to just a 5 to 10-year repayment period. However, since many prefer it, you could expect that waiting list is long—so you do have to be patient. Perkins Loans are usually school-based loans.
Direct Subsidized Loans
These loans are just partially covered by the government. In order to qualify for one of these, you have to be a student who comes from a family with $50,000 or less adjusted gross income (AGI).
Unsubsidized Direct Loans
These loans accrue interest from time of inception, and are said to be relatively cheap—which means waiting list might be a bit long, too.
Grad Plus Loans
These are perfect for students pursuing Master’s, Post Baccalaureate, or Doctorate Degrees.
Parent Plus Loans
As the name suggests, parents borrow these loans for their children. Aside from biological parents, a student’s guardians, stepparents or adoptive parents could also apply for these. Both Parent Plus and Grad Plus loans come with fixed 7.9 percent interest rate, which starts upon the transfer of financing from borrower to school.
Finally, there are also consolidation loans, which mean that you can mix a couple different loans into one loan so that overall costs might be reduced. However, repayment may have to last for up to 30 years or so.
How to Apply for Loans
The answer to how you should apply and qualify for student loans always depends on the type of loan you’re trying to apply for. Here’s what you should keep in mind:
Applying for Private Loans
As mentioned earlier, it’s easy to apply for private loans. All you have to do is talk to your private lender, ask for an application form, fill it up, submit it, and then you’d be told whether you actually qualify for the loan or not.
Take note that just because you don’t have enough credit does not mean you’ll automatically get disqualified—that’s the beauty of private loans. Some private lenders actually prefer those with low credit score because they know those people really need help. It’s best to compare rates from various lenders, though, just to be sure you’re getting the best offers.
Applying for Federal Loans
As there are various kinds of Federal Loans, it’s also imperative that there are a couple of steps you have to take. These are:
1. Fill up the FAFSA (Free Application for Federal Student Aid). You can get said form at fafsa.ed.gov for free.
2. In order to fill up the FAFSA, make sure that you have the following: Social Security Number, Driver’s License, Bank Statements, Federal Tax Forms (Students and Parents), Most Recent W-2 Form, and Paperwork for bonds, stocks, and other assets.
3. After filling up the FAFSA, the government would determine which type of federal loan you qualify for. Eligibility will be reviewed.
Take note that schedule for completing FAFSA differs per institution and state. Connecticut holds the earliest date for completion (February 15), and then in March, completion happens in California, Michigan, Maryland, Indiana, and Idaho. Try to complete the forms as soon as you can, though, to ensure that you’d be prioritized. Don’t wait until the last minute.
If you want more guidance on filling up those forms, you can apply for paid service companies that could help you out with them, too.
How Much Would Students Have to Pay?
Well, student loans don’t really cost the same in all places. However, you can be sure that private loans have fixed interest rates—whatever happens to the economy, you’d pay only what you have agreed on; it will never change.
On the other hand, since federal loans are backed by the government, they also easily suffer from inflation rate, so sometimes, interest rates really do shoot upwards.
However, you wouldn’t have to worry about interest rates being extremely high because there’s a skycap (limit) of 8.25% for undergraduates, 9.5% for graduate students, and 10.5% for parent borrowers.
As with anything that you have borrowed, you do have to keep in mind that you’d have to return the loan, too. With private loans, you have to make sure that you start paying a month after you have borrowed.
For federal loans, however, you can start paying until you have graduated from school. Usually, this happens on a 10-year period, also known as the 10-year Repayment Plan.
Now, if you feel like you need extra help in paying off those loans, there are a couple of options you could try. Here are some suggestions.
1.Pay as You Earn
This is a program that the government designed to help reduce monthly costs that a student would have to pay. You do have to make sure that you’re really enduring financial hardship before you apply for this, so you’d have to show your monthly bill. Loans eligible for this are: Direct Unsubsidized, Direct Subsidized, Direct Consolidation, and Direct PLUS.
2.Income-Based Repayment (IBR) Plan
The greatest thing about the IBR Plan is that it’s designed to fit a borrower’s lifestyle—and financial capabilities. This means that if you have less then another person’s finances, you can still be sure that you’ll be able to repay your loans. There are also certain factors that would be considered before you get to use the IBR Plan. These are:
Federal Interest Loan Debt
You’d have to answer questions regarding the date when you have received the loan (IBR works for loans approved after July 2014; the interest rate of the loan; total amount of the student loan debt, and; whether you have a spouse and you have filed for joint tax return to help with repayment.
Adjusted Gross Income (AGI)
You should divulge what is stated on last year’s federal income tax return as your adjusted gross income. In case you are married, you also have to indicate. If you don’t know what your AGI is, just indicate your annual pre-tax earnings.
Indicate the number of people living in your household, including spouse, children, and other dependents.
State of Residence
There are three choices: The Continental United States, Alaska, and Hawaii.
After all these factors have been reviewed, you will then be given a report of the monthly payment that you’d have to adhere to. You have to contact your loan provider so you could apply for IBR, if desired.
Refinancing could also be done to student loans, the way it’s done with other financial loans. When you refinance loans, you basically take out new loans with more favorable terms so that you can pay your already existing loan.
Here’s a good example: Suppose you have taken out a loan that you have to repay in 10 years, with 8% interest rate and you’re having a hard time paying it off. You can then take out another 10 year loan, with only 5% interest rate, and use that loan to pay off your existing debt.
Somehow, when your refinance, student loan lenders give you favorable terms because they know you need help. No equity would be extracted from your existing loan, though. When you get to refinance properly, you can then focus on one loan alone.
Sometimes, students really have a lot of issues to deal with that prompts them not to pay off their loan in time. In this case, repayment would be allowed to be deferred for at least 6 months to a year; other times, it could be extended longer, but meetings would have to be done.
There are a couple of reasons why loans are agreed to be deferred. These include:
- Working on an internship
- Still attending school (even after graduation; getting a loan that’s meant for undergraduates, and then going back to school after)
- Economic hardship
Again, you’d have to contact your lender to know whether you’re eligible for deferment or not. You cannot defer loans on your own because it would seem like you are running away from them—and that’s not what you’d like your lenders to think. However, you have to keep in mind that when you have your loans deferred, interest gets higher—and you have to be prepared for that.
5. Student Loan Forgiveness
And finally, there’s something called Student Loan Forgiveness—which basically means that you’ll be absolved of all your debts.
It sure sounds like a miracle, right? Well, not everyone would be forgiven off their loans—even if they file for bankruptcy, because seriously speaking, one can take on various jobs so he could get some income, or apply for other repayment options, instead of just filing for bankruptcy and thinking his loan would be forgiven.
However, some students who show loyalty, and pay their debts on time might be considered for this option. If a borrower has made minimum payments for 20-year loans, and they remain consistent, there’s a high chance that his loan might be forgiven.
Another option would be for the borrower to work in public service. You see, service to the public shows that one could be rewarded for his good behavior, and the 20-year loan could then be reduced to just 10 years, with chance of forgiveness. This way, a person could apply for the Public Service Loan Forgiveness Program.
To be eligible for the Public Service Loan Forgiveness Program, you have to make sure that you work at one of the following areas:
- Early Childhood Education
- Public School Education
- Public Safety Services
- Public and School Library Services
- Law Enforcement Services
- Military Service
Choose the Right Loan for You
Remember, not all student loans were created the same way. Hopefully, this guide was able to help you sort your thoughts out, and figure out which student loan is right for you.
Don’t let your financial status hinder your educational success. There is always a student loan waiting for you!