When it comes to paying for college, student loans may be a necessity for some families. But all student loans were not created equally. Before your child signs that promissory note, it’s important to understand the student loan commitment, as well as the various kinds of student loans available, and of course, how to apply.
Direct Student Loans
Direct student loans are paid directly through the federal government and come in two types – subsidized and unsubsidized. Subsidized student loans do not accrue interest while the student is in school at least “half time” – meaning 6 or more credits, and for a 6-month grace period thereafter, according to the Federal Student Aid. Unsubsidized loans, however, begin accruing interest immediately, and are usually offered in addition to subsidized loans, or to help pay for graduate school.
The good news is that direct loans are offered with low, fixed interest rates and can be repaid based on the student’s post-graduate income. (This is called income-based repayment.)
PLUS Loans are available through the Federal student loan program and are available to graduate students and parents of undergraduates. PLUS loans usually have higher interest rates than Direct student loans and accrue additional loan fees, which are usually a percentage of the overall amount borrowed, according to the Federal Student Aid. Like other unsubsidized loans, PLUS Loans begin accruing interest immediately.
The benefit of taking out PLUS Loans, as opposed to private loans, is that the interest rate is fixed for the life of the loan.
Federal Perkins Student Loans
Federal Perkins Loans are low interest federal loans made directly by the school. Perkins loans are reserved for undergraduate and graduate students with what the federal government calls “exceptional financial need.”
Private Student Loans
Private student loans are offered by banks and other lending institutions. They start accruing interest immediately, and the interest rates may be variable – meaning that they may fluctuate with the markets. As a general rule, according to FinAid, private student loans should be seen as a last resort, as they tend to significantly increase the overall cost of education.
Understanding Student Loan Payment & Repayment
Once a student or parent agrees to take out a student loan, they are usually applied for by the school on behalf of the student. (The exception is private student loans, which can be applied for directly through the bank or lending institution.) Once tuition and other education expenses are paid, if there is any overage, it will be issued to the student in the form of a check. This money can be used to pay living expenses during school. If your child receives any student loan overage, talk to them about using this money responsibly.
Once students leave school, regardless of whether or not they graduate, they must repay their student loans. With federal loans, there is a 6-month grace period once you leave school before you have to start paying back your loans. With federal loans, there is a six-month grace period wherein loans are in “deferment,” meaning they do not have to be paid back during this time[KD1] . Often, there are income-based repayment options.
It is extremely important for students to think about the amount that they’re borrowing, and their ability to repay their loans once they’re out of school. If possible, it’s a good idea to limit the amount of student loans you take out by saving as much for college as possible, and applying for scholarships.
Applying for Student Loans
All students who intend to go to college should fill out the Free Application for Federal Student Aid (FAFSA) between Jan. 1 and June 30 every year they intend to go to college. The U.S. Department of Education recommends filling out the FAFSA as soon as possible, as aid money is limited. Once your child’s FAFSA has been processed, he or she will receive a Student Aid Report, which is simply a summary of the submitted FAFSA. Then, if and when your child gets accepted into his or her college of choice, your child will receive an aid offer from the school, with your Estimated Family Contribution (EFC), as well as a list of your borrowing options. From there, your child must contact your school if he or she wants to take out a student loan.