- Paying for College
- Ways to Pay for College
3 Types of College Loans to Consider
Borrowing is a reality for many families paying for college. But that reality can be less painful if parents and students learn how to be smart, responsible loan shoppers who understand all of their options.
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.
1. 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.
2. Then Consider a PLUS Loan
Direct PLUS loans are also guaranteed by the federal government and are awarded based on the information in the student's FAFSA. These loans are available only to parents of dependent undergraduates and to graduate students. They have higher interest rates and fewer repayment options than Stafford loans, and parents cannot qualify if they have an adverse credit history. But the interest rates are fixed and repayment can be deferred until six months after the student leaves college.
3. Look at Private Loans as a Last Resort
Before turning to private college loans, consider other loan options, including borrowing against a home or from a credit union. Check with your state government, too. Some state agencies provide low-cost loans for state residents
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.
College financial aid offices sometimes disburse private loans. If such a loan shows up in your financial aid offer, you don't have to accept it. You are free to find your own loan provider. Be sure you discuss the loan terms and any questions you have with the financial aid office.
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? Look at the lender list provided by the college. Don't hesitate to ask the college how they developed the list. They should be based on the college's good experience with the lenders. The college may have also negotiated favorable terms for the benefit of students.
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