Loans for college

As a college student, there’s a good chance that you’ll end up needing extra help to pay for your schooling. Average college tuition and fees have risen 1,200% since 1980 — which is much more than the 236% increase in inflation over the same period.

Even with scholarships and grants, the possibility that you’ll have some type of college funding gap remains. This is where student loans come in. With the help of student loans, you can cover the costs of getting a higher education.

There are 3 main types of student loans: federal, private and refinancing. Here’s what you need to know about each type, and how they can potentially help you pay for college

Federal student loans are made 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’re 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

If you qualify, based on need, the government pays your interest while you’re in school so it doesn’t accrue and it isn’t added to your loan balance later.

• Parent PLUS Loans

Parents can help their kids cover college costs with Parent PLUS loans. These loans are in the 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

There are no subsidized loans for graduate students. However, it’s possible to get 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’s 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 get all of your loans into one payment and one interest rate. With a Direct Consolidation Loan, you’re 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.

Federal student loan eligibility is fairly straightforward. 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’re male.

For PLUS loans, you’re required to submit to a basic credit overview. While there isn’t a credit score requirement, if you have a very negative item like an account in collections on your credit report, you won’t be eligible for a PLUS loan.

It’s fairly easy to apply for federal student loans. You need to go to the Department of Education’s student aid website and set up an ID. Once you’ve done that, you can fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA can be completed and submitted electronically. There’s also a handy tool designed to interface with the IRS to pull the needed financial information and automatically add it to the form.

Once you complete the form, the information will be 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 scholarships that might be offered by the school.

Federal student loans come with caps on annual borrowing amounts. The cap is based on your year in school.

It’s important to note that there are aggregate limits on your student loans, limiting how much you can borrow in total. For example, the total federal student loan limit for graduate students, which includes their undergrad loans, is $138,500.

Due to the high cost of college, it’s possible that, even with student loans and other types of federal, state and institutional aid, you might still face a funding gap. In that case, it can make sense to consider private student loans.

Rather than being originated through the government, 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 get private student loans, it’s important to understand the differences between private versus federal student loans.

• 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’s possible to extend that with different plans, providing you with the ability to extend the term to 20, 25 or 30 years, depending on your loan program. Private student loans often 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 focus on federal loans. In fact, programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness only apply to federal loans. You might not receive forgiveness for private student loans.

• Eligibility

Federal student loans are easier to get than private student loans. You don’t need to meet specific credit requirements and almost anyone can get the loans. Even with PLUS loans, as long as you don’t have a major blemish on your credit report, you can qualify for them. Private student loans come with credit criteria set by the lender, and you might need a co-signer to get a loan.

Even though it’s possible to get a lower interest rate with private vs federal student loans, the fact that you can miss out on benefits leads many students to avoid them.

However, it can make sense to get private student loans, depending on the situation. First of all, the cap on federal student loans is too low to cover all the costs at most schools. As a result, some students still have a funding gap — even after they receive grants and scholarships on top of federal student loans. In these cases, getting some amount of private student loans can help pay for college.

As a result, some students still have a funding gap — even after they receive grants and scholarships on top of federal student loans.

Additionally, sometimes private student loans can make more sense when the choice is between private student loans and taking PLUS loans. The interest rate on PLUS loans is much higher than on private student loans. If you have good credit or can find a co-signer, you can reach the limit in unsubsidized and subsidized federal loans and then turn to private loans, instead of paying the much higher rates for PLUS loans.

Each lender has its own requirements. In general, though, you need to have a good credit score and show that you have income. Additionally, you need to show that you’re 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 get the loan.

Consider your needs and choose the best lender to help you reach your goals.

When getting private student loans, shop around. There are many sites that can help you compare private loan terms. Additionally, you can 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.

Once you finish school, and you have multiple student loans (and payments and interest rates), 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 smaller monthly payments. This can help you save money and improve your monthly cash flow.

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. It 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’re 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’s possible to choose which loans to refinance. Some borrowers find that it makes sense to consolidate their federal loans with a Direct Consolidation Loan, and then use refinancing for their private loans.

For some borrowers, it might make sense to refinance federal student loans. For those with high incomes, who won’t qualify for income-driven repayment, it might be attractive to refinance to a lower interest rate to save money. Additionally, if you don’t work in a profession that allows you to take advantage of PSLF and other forgiveness programs, refinancing can be attractive.

If you want to reduce your interest rate and you’re sure you won’t need access to federal benefits later, refinancing might work. Carefully consider the situation and research before deciding to refinance. Once you refinance federal student loans, you can’t change your mind and reverse the process.

For those with federal student loans, there are various programs, like 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 work in an eligible job, while on income-driven repayment, 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’s 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

If you’re still on one of the income-driven repayment plans, and you still have a balance after 20 or 25 years, depending on your plan, the remainder of your balance could be forgiven.

There are a number of plans circulating revolving around student loan cancelation. Even though 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, much of the debate surrounds the following issues:

How much debt should be canceled

Figures ranging from $10,000 to $50,000 to all of it have been circulating.

Who should receive cancelation

There is debate over means-testing, and only canceling student debt for those at certain income levels, versus just canceling it for everyone.

Types of loans

Finally, there is debate 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, it’s important to pay attention to your own loans, figure out which programs you’re eligible for and look for ways to reduce how much you have to borrow to attend school.