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FINANCIAL AID FOR COLLEGE
Figuring out how to pay for college can be a stressful, complicated process. Using online tools can ease your search for the best private student loans by letting you directly compare loans and interest rates from different lenders. Just a few minutes and a minimum amount of personal information will generate a number of options.
Private loans can make sense when you’ve borrowed all you can in federal student loans, qualify only for the highest federal interest rates, or need funds quickly.
How to Pay for College
When it comes to paying for college, most financial experts dispense similar advice that follows this roadmap:
1. Use scholarship money first – Simply put, this means grants, scholarships, or any other option that doesn’t require repayment.
2. Use federal loans next – Traditionally, this has been no-brainer advice because Uncle Sam has offered low-interest, fixed-rate loans that eclipsed the offerings of most private lenders. What’s better is if you qualify for subsidized loans (with these, the government will pay your interest while you’re in school).
3. Use private loans last – Accordingly, many experts caution against private loans because most low interest rates are variable (and likely to rise over time), while fixed rates are usually higher than the rates on federal loans.
Federal Student Loans
There are two federal student loan programs: The Perkins Loan Program and the Direct Loan Program. The former program is much smaller than the latter. You must file a Application for Federal Student Aid (FAFSA) to be considered for federal student loans.
Perkins Loans
A federal Perkins Loan is almost always going to be your best student loan option if you are eligible.
Your school, which functions as the lender in this case, awards Perkins Loans as part of a financial-aid package to students who demonstrate significant financial need — essentially, this means it will cost much more for you to attend school than your family can afford to pay; the bigger the gap, the more significant the need. This loan is subsidized, meaning interest is paid for you while you’re in school.
Direct Subsidized Loans
Direct Subsidized Loans are also reserved for students who demonstrate financial need via their FAFSA, but the bar is lower here. While your school is your lender for a Perkins Loan, Uncle Sam is your lender for Direct Loans. Only undergraduates are eligible for Direct Subsidized Loans.
Direct Unsubsidized Loans
Good news: You can qualify for Direct Unsubsidized Loans without demonstrating financial need, and all undergraduate and graduate students are eligible.
Bad news: You’re on the hook for the interest that accrues while you’re in school, though you can choose not to pay it until after you’re done (however, this means you’ll end up paying more overall).
Direct PLUS Loans
PLUS Loans allow graduate students and the parents of undergraduate students to pay for educational costs in excess of what other financial aid, including the federal loans listed above, might cover. Unlike other federal loans, a credit check is performed; those with spotty credit history may not qualify. Those who don’t qualify for the PLUS program may be able to borrow more direct unsubsidized loans.
Private Student Loans
Private student loans are on offer at scores of banks and credit unions. Sallie Mae, which originally provided federal student loans, is probably among the most well-known private lenders. Interest rates vary from lender to lender, and they can be either variable (more common, especially with lower rates) or fixed.
Mortgage and Home Equity Loans
It is not uncommon for parents to take out a new mortgage on their home in order to pay for college. After all, most parents have the majority of their net worth tied up in their homes and their 401k or other retirement plans.
Intra-Family Loans
The two big advantages of this type of loan are – typically lower interest rates and little or no paperwork to get “approved” for the loan. They also have one big downside, which is the fact that you are borrowing from your family and if you don’t repay the loan according to the terms agreed upon it can cause stress within the family.
401k Loans
In most households these days, at least one parent has a 401k retirement plan through their employer and makes regular contributions to the plan directly out of their paycheck. Most of these plans have a loan provision that permits account owners to borrow from their savings. The maximum loan by law is 50% of the vested account balance, and must be repaid within five years through payroll deductions.
Various studies have shown that when students are at least partially responsible for paying for their own college education – by way of work-study, using their own money or taking out student loans – they tend to do better academically than students who are not responsible for any share of their education costs. As parents, if you want your child to be responsible for paying a part of her college costs and she will need a loan to do so, you can either lend her the money yourself (Intra-family loan) or let her take out a student loan. Depending on whether she demonstrates a financial need for student aid, exceptional financial need or no financial need at the college that she attends, she will end up with a Subsidized Stafford loan, a Perkins loan, an Unsubsidized Stafford loan and/or a private student loan. In general, the best loans are the Subsidized Stafford and Perkins loans followed by the Unsubsidized Stafford loan, and as a last resort, private student loans. Special offers from lenders change constantly for private student loans, so it may require some homework using the internet and by talking with your college to determine which lender has the best overall rates, origination fees and repayment terms.
