The Ultimate Guide to Student Loans (Federal and Private)

There are many ways to pay for college but student loans are one way to afford school. In this student loan guide, you’ll come to understand all your federal and private student loan options.

Let me start with the basic premise of student loans. It’s meant to fill the gap between your financial aid and the cost of attending. The idea is not to maximize but to optimize how student loans are used through college.

Getting started with student loans

Your loan needs will vary based on money parents saved for your education, the location of your school, and your ability to work while attending college.

But I want you to keep in mind these general guidelines through the student loan process. They are:

• Compare the cost of attending different schools and their financial aid offer.
• Know the total cost of attending college, not just tuition.
• Only borrow as much as you need to cover the gap between financial aid and the total cost of attending.
• Choose federal student loans before private loans.

Okay, so now you have the guidelines, I want you to spend more time researching scholarships, grants, and part-time work opportunities with tuition benefits.

Types of Student Loans

With student loans, you have two options: federal student loans and private student loans.

Federal student loans are issued directly by the federal government, while private loans are typically made by private banks, credit unions, state agencies, or other financial institutions.

Federal Student Loans

As long as you meet the basic eligibility requirements, federal student loans can help fill in the gap for education-related expenses that scholarships, grants, and work-study don’t cover.

Loan Terms

Understand these basic financial aid terms:

• Eligibility – refers to the minimum requirements you must meet in order to qualify for a loan. The eligibility varies between federal student aid versus private student loans (which may consider your credit score).
• Interest Rates – is the amount that a lender charges for lending you money. The interest rate is important when considering which loan to take. Some loans are fixed while others are variable.
• Origination Fees – charged to the borrower as a processing fee.
• Repayment Terms – refer to the way in which you will pay back your loan. The promissory note states the repayment terms of your loan and varies according to the type of loan received.
• Promissory Notes – is a “promise to pay” contract between you and the lender that is providing your loan money. You must sign a promissory note that legally binds you for paying back the loan.
• Loan Limits – refer to the maximum amount of money you are eligible to receive under a loan program. The loan limits are lower for freshmen than for upper class and graduate students. In the case of PLUS loans (for parents and graduate students), the loan limits are determined by the cost of attendance minus any other aid you are expected to receive (for example, in the form of grants or scholarships).

Start with federal student loans

Your best student loan option starts with federal loans. They have the simplest application process and better borrower protections such as deferments, income-driven repayments, and loan forgiveness. Always choose federal student loans over private loans. Consider private student loans when you’ve exhausted all your federal loan options.

There are different types of federal student loans for undergraduate and graduate degrees.

For undergraduates:

• Direct subsidized loans for undergrads with demonstrated financial need. With subsidized loans, you are not responsible for any interest that accrues while in school.
• Direct unsubsidized loans are available for all undergrads and accrue interest while in school. The interest added to your balance after your grace period.
• Parent PLUS loans are for parents with dependent undergraduate students. Parents can borrow as much as needed to cover college costs. However, a parent’s credit history must be very good.

For graduate students:

• Direct unsubsidized loans are available for all graduate students. These loans accrue interest and added to your loan balance at the end of the grace period.
• Grad PLUS loans don’t have borrowing limits and are for graduate and professional students. Unlike Direct Loans, PLUS loans require you to have fair credit to qualify

How much can I borrow?

There are limits in how much federal student loans you can get based on the year in school, loan type, and whether you’re an independent student. Your school determines the loan type(s) if any, and the actual loan amount you are eligible to receive each academic year.

If you qualify, you can take out multiple types of federal loans to cover your college costs. Keep in mind there is a maximum amount you can borrow for the duration of your higher education.

What are the current interest rates?

The interest rate varies depending on the loan type and (for most types of federal student loans) the first disbursement date of the loan. Your interest rate will depend on the rate that has been set by Congress for that year. Interest rates are locked for the duration of that loan.

Unlike other forms of debt, such as credit cards, Direct Loans are daily interest loans, which means that interest accrues daily. Depending on whether your loans are subsidized or unsubsidized, you may or may not be responsible for paying the interest that accrues during all periods.

How to apply for federal student loans

Start by completing the Free Application for Federal Student Aid. FAFSA is the application for all federal student loans. You want to complete FAFSA because it is what colleges use to determine need-based aid such as federal grants, work-study, and potentially university-provided scholarships.

Step 1: Complete the FAFSA. You may need the help of your parents to do as it will require their information for all dependent students.

Learn more: An easy guide to completing the FAFSA

Step 2: After you complete the FAFSA, you’ll receive a Student Aid Report anywhere from 1-3 weeks. The SAR shows a summary of all the information you’ve entered. Review the SAR completely for accuracy as soon as possible. If information is inaccurate or anything has changed, then edit your FAFSA immediately. This can all be done online.

Step 3: Sometime after the completion of FAFSA, you’ll receive a financial aid award letter from the colleges and universities you listed on the application. The letter tells you how much aid you qualify for that includes federal or state grants, work-study, need-based scholarships, and federal student loans.

If you find only federal loans in your award letter, then you did not qualify for any other types of aid from that college. This isn’t a final ruling. You can request to speak with a financial aid officer to discuss your options.

Complete the FAFSA by visiting fafsa.gov or studentaid.gov

Private Student Loans

Private student loans help bridge the gap between the student aid you receive and the actual cost of attending school. Banks, credit unions, and other financing companies offer private loans. These lenders set the conditions, terms, interest rates, and loan limits. And will qualify your loan based on credit history, ability to pay, or whether you have a cosigner or not.

With private loans, you don’t need to complete the FAFSA. However, you’ll need to complete an application with each lender.

When to consider private student loans

If you still need additional money to cover college costs and exhausted your federal loans, then consider private student loans to fill the gap. To qualify private loans, you’ll need to have good credit or might need a cosigner with good credit.

Private loans are a good option but they don’t come with the same benefits as federal student loans. Private loans may have better rates but don’t often include income-drive repayment plans or forgiveness benefits.

With private student loans, you have many options and a wide variety of lenders to choose from. They are made by private organizations such as banks, credit unions, private lenders and other financial services companies. These lenders compete for your business offering different interest rates, fees, and borrower benefits.

Not all private student loans are equal. The terms and conditions of these private loans are set by the lender.

It’s important for you to find a legitimate and reputable lender. Use the following as a guideline to finding the right lender:

• Speak with your high school counselor about private lenders
• Speak with the college and ask for a list of lenders
• Call your current financial institution and ask
• Do research online and ask people you trust for recommendations

There are different types of private student loans. Make sure you’re asking about the right loan based on your college-level: undergraduate, graduate, medical, certification and continuing education.

Getting started with private student loans

Private loans require applicants to have good credit. They follow a lender’s internal underwriting and approval guidelines. Lenders look for strong borrowers who can afford payments, have low debt-to-income, and good credit scores.

Follow these steps to prepare to apply for private loans:

1. Check your credit report. Request your credit report from AnnualCreditReport.com.
2. Get your free credit score. Know where you stand with your score. Learn how to get your credit score for free.
3. Review your credit report. If you identify inaccuracies, dispute them. Make sure the information is correct.

Your credit score reflects the information found in your credit report. A free credit score is a good overview of what may be impacting your creditworthiness.  Learn more about credit reports and scores.

How to apply for private student loans

Start your research on the student loan financial marketplace to find options. Many of these lenders allow you to check your rate without impacting your credit score. It can also offer a provisional approval and many lenders allow you to add cosigners to help with final approval or to get a lower rate.

Lenders may request:

• College enrollment information
• Social Security number
• Income and employment
• Monthly expenses
• W2, pay stubs, or tax filings

Check your rates with lenders today without impacting your score, click here for best student loan marketplaces.

How to compare private student loans

After researching different lenders, you’ll want to compare and determine which option is best for you.

These are a few questions to ask when choosing a private student loan.

• Who is the lender? Are they reputable and been in business for some time?
• What is the interest rate range?
• Variable or fixed interest rates options?
• Is there an application fee?
• Are there origination fees or any other fees?
• Is there a choice of in-school repayment options?
• Are there ways to lower the interest rate?
• Is a cosigner required? And is there a cosigner release?
• Are there programs that let you make more manageable payments after graduation?
• Are there other benefits that make the lender more appealing?
• Is there an after graduation or out-of-school repayment grace period?

There are private student loan marketplaces that help borrowers find, filter, and apply for student loans with multiple lenders with one application. These marketplaces typically allow you to check your rate without impacting your credit score to receive offers.

What to do with your private student loans

Continue with the process once you’ve been offered loan options. After selecting a lender, you finalize an application with that lender, get a hard inquiry on your credit, and submit your documents.

Once approved, it’s time to collect your funds. Your lenders will direct your loan funds are disbursed to you or the college.

It’s important to know every detail of your private loans such as the minimum monthly payment and the first due date. Some private loans require immediate payments while others offer in-school forbearance.

Considerations with private student loans

Private student loans can help fill the gap when federal student loans aren’t enough. But there are some considerations:

• Not eligible for federal student loan forgiveness.
• Don’t come with income-driven repayment plans.
• May not have deferment or forbearance as an option.
• Variable interest rates can change at any time.
• Not regulated by the federal government with fewer protections for the borrower.

These are by no means an argument against private student loans. They do provide the necessary funds to cover the cost of higher education. However, it’s important to know them before accepting a loan from a private lender.