Borrowing is a reality for many families paying for college. But that reality can be less painful if parents and students understand how to be smart loan shoppers.
Need some extra money for college? You may hear about private college loans. They can be helpful to make ends meet, but there are other options you should consider first.
Get Federal Loans First
Federally guaranteed Stafford loans, which are offered as part of financial aid awards, are usually the cheapest loan option. Interest rates are set at lower-than-market levels. If the loan is subsidized by the government, interest will not start accruing until the student is out of school. (Unsubsidized loans will begin accruing interest immediately.) If you are thinking of borrowing, the first step is to file a FAFSA (Free Application for Federal Student Aid). At a minimum, you will be eligible for an unsubsidized Stafford loan.
Then Consider a PLUS Loan
Federal Direct PLUS loans are available to parents of dependent undergraduate students and to graduate students. These loans are based on the borrower's credit rating and a completed FAFSA. The government insures the loan, sets the interest rate, and guarantees other benefits—such as lenient qualification requirements.
To apply, parents must complete a PLUS loan application, which is available from college financial aid offices and the Department of Education's student aid website. Repayment can be deferred until six months after the date the student ceases to be enrolled at least half time.
Look at Private Loans As a Last Resort
Before turning to private college loans, consider other loan options, including borrowing against a home. Another checkpoint is your state office of education. Some states provide low-cost loans for state residents and out-of-state students. Borrowing from a credit union is another option.
Once you have exhausted all sources of cheaper loans, you might consider taking out a private loan. Unlike federal student loans, private student loans are not subsidized or guaranteed by the government. Their interest rates and terms are set entirely by the lender and will be influenced by the borrower's credit rating, not financial need. (A cosigner such as a parent may improve the credit rating used to calculate the loan terms.) You may defer repayment until after you leave school, but interest will start accruing as soon as you receive the loan money.
Shop Around for the Best Private Loan Offer
Do your homework before choosing a private lender. The more you shop around, the more likely you are to find a good deal. Lenders offer various inducements to get business, including interest rate and fee reductions.
Where to start? Many colleges provide lender lists. Don't hesitate to ask how the lists were developed. They should be based on the college's good experience with the providers. The college may have also negotiated favorable terms for the benefit of students.
- See Federal Education Loans for more information about these loans.
- See PLUS Loans for Parents for more information about PLUS loans.
- See Investigating Private College Loans for advice on selecting a private loan provider.
Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.