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Guide to student loans
Average college tuition and fees have risen 1,200% since 1980, far more than the 236% increase in inflation over the same period. Most college students need extra help to pay for their schooling and for many, scholarships and grants are not enough. To plug the shortfall, there are 3 main types of student loans – federal, private, and refinancing – each with their advantages and disadvantages.
This student loan guide provides what you need to know about each loan type, and how they can potentially help you pay for college.
Federal student loan types
Federal student loans are provided by the government. They come with certain protections, including automatic deferment in some cases, and the ability to take advantage of federal loan forgiveness programs and income-driven repayment plans.
Federal loans include:
Direct Unsubsidized Loans
These federal student loans are available to any citizen attending school. Interest accrues while you are in college. When you graduate, and after the grace period ends, the accrued interest is capitalized and added to your loan balance.
Direct Subsidized Loans
A need-based loan in which the government pays interest while you are in school. This way the interest doesn’t accrue and isn’t added to your loan balance later.
Parent PLUS Loans
Parent PLUS loans are in a parent’s name, and the parent is responsible for paying for them. Depending on the situation, these loans might be eligible for some income-driven repayment options.
Graduate Unsubsidized Loans
Graduate students are not eligible for subsidized loans. However, there are unsubsidized loans designed to help cover the costs of attending a graduate program.
Grad PLUS Loans
If graduate school costs more than what you can get with regular federal graduate student loans, it is possible to get PLUS loans to cover the remaining costs.
Direct Consolidation Loan
A Direct Consolidation loan is offered by the federal government as a way to move all of your loans into 1 payment and 1 interest rate. With a Direct Consolidation Loan, you are eligible for certain income-driven repayment programs, as well as for federal loan forgiveness programs.
All student loan interest rates are set each year, according to a formula put forward by Congress.
Am I eligible for federal student loans?
For federal student loan eligibility, you just need to be a U.S. citizen or permanent resident with a minimum age of 18. You need to be enrolled at least part-time at an eligible school and register for Selective Service if you are male.
PLUS loans require a basic credit overview. While there is no credit score requirement, if you have an extremely negative item, such as an account in collections on your credit report, you won’t be eligible for a PLUS loan.
» Read: What to know about need-blind admissions
What can student loans be used for?
Student loans must be used only for specific expenses. If your school finds out you have used your loan to pay for nonmandated expenses, you may be reported and become liable for the money spent.
How to apply for federal student loans
To apply for federal student loans fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA can be completed and submitted electronically, and should only be done via the official government website.
Once you have completed the form, the information is sent to the schools of your choice, and they will come back to you with a financial aid package that includes federal student loans, work-study options and grants, as well as any relevant scholarships offers.
How much can I borrow in student loans?
Federal student loans come with caps on annual borrowing amounts. The cap is based on your year in school.
| 1st year | 2nd year | 3rd year + | |
| Unsubsidized | $5,500 | $6,500 | $7,500 |
| Subsidized | $3,500 | $4,500 | $5,500 |
| Parent PLUS | The remainder of child’s costs | The remainder of child’s costs | The remainder of child’s costs |
| Grad PLUS | The remainder of your costs | The remainder of your costs | The remainder of your costs |
Note that there are aggregate limits on your direct subsidized /unsubsidized student loans, limiting how much you can borrow in total. For example, the federal student loan limit for graduate students is $20,500 annually, with a total cap of $138,500 – which includes undergraduate loans. PLUS loans are available to bridge any gap, but incur a higher interest rate.
» Read: How to pick a degree that is worth the cost
Private student loans
Private student loans are offered by private lenders. These lenders provide a way for you to borrow for school, sometimes closing the funding gap. Before you decide to apply for a private student loan, it is important to understand the differences between private and federal student loans.
Private vs federal student loans
There are some important differences between private and federal loans:
Private loans
lower interest rates set by market interest rates
Offer hardship forbearance of up to 24 months
No student loan forgiveness options
Harder to get and might need co-signer
Federal student loans
higher interest rates set by Congressional formula
Option to choose from 4 different repayment options
Availability of student loan forgiveness programs
Easier to get because of lack of credit requirements
Interest rate
Private student loan rates are often lower than federal student loans rates. Federal interest rates are set by a Congressional formula, based on Treasury yields. Private student loan rates are tied to market interest rates. Everyone has the same federal loan rate, based on the year of the loan, while private loan rates are different based on various criteria.
Repayment terms
In many cases, private student loans have a wider variety of repayment terms. The standard repayment term for federal loans is 10 years, but it is possible to extend that to 20, 25 or 30 years depending on your loan program. Private student loans usually have terms ranging from 5 to 20 years.
Hardship programs
While some private student lenders offer hardship forbearance of up to 24 months, there are more options available with federal student loans. Federal student loans offer the opportunity to choose from 4 different income-driven repayment programs that set your payments based on your discretionary income.
Loan forgiveness
Most student loan forgiveness programs are meant specifically for federal loans. For instance, programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness only apply to federal loans.
Eligibility
Federal student loans are easier to get than private student loans because you don’t need to meet specific credit requirements. As long as there is no major blemish on your credit report, you can also qualify for PLUS loans. Private student loans come with credit criteria set by the lender, and you might need a co-signer to get a loan.
Does it make sense to get private student loans?
While it is possible to get a lower interest rate with private student loans, you can also miss out on benefits, leading many students to try and avoid them. However, many students cannot quite finance college after receiving grants, scholarships, and federal loans, and turn to private loans to bridge the gap.
Additionally, private student loans can make more sense when the choice is between private student loans and PLUS loans, which have much higher interest rates. Rather than taking a PLUS loan, particularly if you have good credit or can find a co-signer, you might take advantage of the full unsubsidized and subsidized federal loan amount available, and then take out a private loan for any additional amount needed.
How to get private student loans
In general, you need a good credit score and be able to show that you have income. Additionally, you have to prove you are enrolled in an accredited program. If you don’t qualify for a private student loan or can’t get the interest rate you want, you can get a co-signer to help you secure the loan.
When applying for private student loans, shop around. There are many sites that can help you compare private loan terms. You can also find lenders with hardship programs, autopay discounts and a co-signer release. Consider your needs and choose the best lender to help you reach your goals.
Student loan refinancing
Upon graduation you may have multiple student loans (and payments and interest rates), thus it can be difficult to keep track of everything. Student loan refinancing is a process in which you take out a bigger loan and use that loan to pay off your smaller student loans.
Depending on your creditworthiness and other factors, you might be able to get a lower interest rate, resulting in lower monthly payments. This can help you save money and improve your monthly cash flow.
» Read: Refinancing student loans
Student loan refinancing vs federal student loan consolidation
Private student loan refinancing is different from federal student loan consolidation.
Federal loan consolidation
All of your federal loans are replaced by one new consolidation loan. This takes the weighted average interest rate of all your loans and rounds it up to the nearest ⅛ of a percent. You can use it to combine all of your federal undergraduate and graduate subsidized and unsubsidized loans. You are still eligible for income-driven repayment and federal loan forgiveness.
Student loan refinancing
When you refinance student loans, you end up paying off the other loans with your new, larger loan. When you refinance federal student loans, they become private and are no longer eligible for federal forgiveness or income-driven repayment.
It is possible to choose which loans to refinance. Some borrowers find that it makes sense to consolidate their federal loans with a Direct Consolidation Loan – this can make them eligible for additional forgiveness programs and repayment plans, and then use refinancing for their private loans.
Does it make sense to refinance federal student loans?
Borrowers with high incomes ineligible for income-driven repayment plans might find lower interest refinance options. Additionally, if you don’t work in a loan forgiveness-eligible profession, refinancing can save you money.
Can you convert private student loans to federal?
While it is not possible to convert a private student loan to a federal loan, you can refinance federal loans into a private one. This step is usually taken in circumstances when an individual needs to consolidate all their loans into a single debt. Once you refinance federal student loans, you can’t change your mind and reverse the process.
Student loan forgiveness
There are various programs for those with federal student loans, such as loan forgiveness, designed to forgive all or part of your student loan balance, as long as you meet certain conditions.
Public service loan forgiveness
This is aimed at those who work for qualified non-profit and government organizations. If you are on income-driven repayments, and make 120 qualified payments, your remaining balance can be forgiven.
Teacher loan forgiveness
Teachers working in certain areas can receive up to $17,500 in federal loan forgiveness after five years.
National health service corps
It is not technically forgiveness, but if you participate in one of the many loan repayment programs aimed at health professionals you could get help repaying portions of your student loan balance.
Income-driven repayment
Certain income-driven repayment plans forgive loan balances after 20 or 25 years.
Do private student loans qualify for loan forgiveness?
Private student loans don’t qualify. However, there are options to change the repayment terms, for example by refinancing or consolidating debts. If you are struggling to make the payments, your lender may also offer forbearance, during which you can temporarily pause payments.
What about student loan cancelation?
Although Congress has given the executive branch the ability to cancel student loan debt without the threat of paying taxes on the canceled amount, not much movement has been made. Currently, there is an ongoing debate about this, which involves the following key issues:
How much student debt could be canceled?
This is unclear, figures ranging from $10,000 to $50,000 to all of it, have been circulating.
Who could receive cancelation?
There is debate over means-testing, and only canceling student debt for those at certain income levels, rather than just canceling it for everyone.
What types of loans could be forgiven?
There is disagreement around whether private loans should be included. Additionally, some believe that only public school debt should be canceled, not student loans used at private schools.
In the end, is important to pay attention to your own loans, figure out which programs you are eligible for, and look for ways to reduce how much you have to borrow to attend school.
Additional student loan FAQs
Can you use student loans for a car?
Student loans may be used to cover transport costs, but this refers to items such as bus and train passes, rather than assets such as cars.
Why can’t personal loans be used for education?
Many lenders have restrictions that stop individuals from using a personal loan to cover their education. There are some lenders that grant loans for this purpose, but a college applicant is unlikely to have the requisite credit history to apply.
When should you apply for student loans?
You can apply for private loans at any time. Federal student loans have set deadlines, so it is advisable to complete the FAFSA as early as possible. You can usually submit your FAFSA application for the following year as early as October 1. The final deadline is usually June 30.
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