Student Loans 101
Not sure how you (or your kids) will pay for college? You might be planning on a combination of savings, scholarships and grants, but it doesn't hurt to understand your options for student loans too.
Where can students get a loan?
There are two main categories of student loans:
- Federal loans -- Federal government loans with fixed interest rates. Repayment isn't required until after graduation.
- Private loans -- From a bank or other entity, these loans often have variable rates. Repayment may begin while the student is still in school.
Federal or private -- which is best?
Experts generally recommend applying for federal loans first because they typically come with lower interest rates and more flexible repayment options. The first step is to complete the Free Application for Federal Student Aid (FAFSA), and then to consider three types of federal loans:
- Federal Direct Loans -- Unsubsidized loans are available to all students, regardless of financial need. These loans start accumulating interest as soon as they are received. Some students may qualify for subsidized loans, which cover the interest while the recipient is in school.
- Federal PLUS Loans -- Geared to graduate and professional degree students, or parents of students pursuing undergraduate degrees, a PLUS loan requires a credit check.
- Federal Perkins Loans -- These are need-based, government-funded loans administered by the college or university. The amount available to an individual student depends on how much is still available at the school, so apply early.
How to "fill in the gaps." Federal loans may not be enough to cover all education costs. In that case, a private loan may help. The school's financial aid office can help identify the available options, but they generally fall into three categories:
- State agency loans (for residents or students enrolled at a school in the state)
- Traditional bank loans (credit check and co-signer are typically required)
- School loans (administered by the school, often with fixed rates)
With all of these alternatives, it may be tempting to borrow too much. Students should consider the earning potential of their major before borrowing, and take only what can be repaid within a reasonable timeframe (usually about 10 years).
That way, student loans won't end up as a burden; instead, they'll be a smart investment in the future....