A Guide To Applying For Student Loans
With the rising costs of a college education, more and more students will look towards some type of loan to help pay for tuition, boarding and other expenses. The difference between a student loan and other forms of financial aid, like grants and scholarships, is they must be repaid, along with any interest accrued.
Federal Government Loans
Federal loans are the most common type of student loan. They feature low interest rates and do not require a credit check or collateral. A subsidized federal loan is based on a person's needs, and interest is not charged until the student begins repaying the loan. An unsubsidized loan is not need based and interest is charged until the loan has been paid in full. There are several types of federal student loans to choose from:
- Federal Perkins Loans: Made through an institution's financial aid office, this loan is low-interest bearing and is designed for undergraduate and graduate students with a heavy financial burden. Since the lender is the actual school that set up the loan, payments are made directly to the school itself. The school loans the money through government funds. Checks are paid directly to the borrower to be used for any student expenses.
- Federal Stafford Loans: Federal Stafford loans can be subsidized or unsubsidized. Factors like grade level, student status and whether or not the student is independent will affect the amount that is allowed to be borrowed. Students may not always qualify for the maximum amount allowed for a Stafford loan. In this scenario, a private student loan may be needed to meet all school expenses.
- PLUS Student Loans: The PLUS student loan is a federal loan designed for parents who wish to take out loans to help meet their child's scholastic financial needs. In other words, a PLUS loan can be a supplemental loan on top of the financial aid already being received. To qualify, a parent would have to pass a credit check.
A private student loan can either replace the federal student loans listed above, or can be used to supplement any federal loans that do not meet the student's entire financial needs. These loans are much more difficult to obtain, and feature variable interest rates that can be much higher than federal loans. Unlike federal loans that feature income-based repayment options, and payment forgiveness, rules regarding loan payments are much more stringent for private student loans. These factors, along with private lenders having a tendency to loan much more money than a student can realistically repay have caused private student loans to garner much criticism.
How Much Should Be Borrowed?
Financial experts advise borrowing an amount of money that can be comfortable repaid after finding employment upon graduation. The general rule is to take out a loan that will only deduct 10 percent of a borrower's monthly income once he or she has joined the workforce. For parents who are considering taking out a loan for their child's higher education, they should be paying no more than 35 percent of their gross monthly income towards all loan repayments, which include student loans, credit cards, mortgages and automobiles. All funds from federal loans should be used before considering a private loan.
Applying for Student Loans
Students will need to begin filling out the Free Application for Federal Student Aid, more commonly known as FAFSA, during the time they are applying for college. On the FAFSA form, students can list the schools that they have applied to. The United States Department of Education will use the information provided from the FAFSA form to help calculate the amount of aid a student will need. This data is then sent to the various schools that the student listed on his or her FAFSA form. A Student Aid Report, or SAR, will be sent back to the student several weeks after submitting the FAFSA.
The student then needs to make any corrections and return the SAR to the appropriate address. Upon gaining admittance, the school's financial aid office will provide the student with an award letter disclosing the type of financial aid (federal loan) that the student may receive. The school's financial aid office will also inform the student how his or her financial aid will be distributed.
Federal PLUS loans do not require a FAFSA. The intended borrower will have to submit a loan application, then sign a promissory note. A credit check is also needed to determine if the borrower is eligible to receive this type of federal student loan.
Students who are interested in applying for a private student loan will have to shop around and do their research on the various financial institutions that offer private student loans. Sallie Mae, major banks and credit unions are few examples of financial institutions that offer a private student loan program. Interest rates can vary by lender, and most of these financial institutions offer more information regarding the application process and various options available on their website.