If you’re planning on going to college, you will probably need to take out student loans. But if you’re new to the student loan process, you should proceed carefully. There are so many types of student loans out there – and not all are created equal.
Before you take out a student loan, you should understand the ins and outs so you make the right decision. Keep reading as we break down the different types of student loans, how they compare and what options are available to you.
How to get a student loan
There are two main kinds of student loans: federal and private. In general, you should always maximize your federal student loans (and other types of financial aid) before resorting to private student loans.
How to get a federal student loan
When it comes to student loans, the first rule of thumb is to maximize federal options before venturing into the realm of private loans. Federal loans generally offer more favorable terms and flexible repayment options. As someone who has been through the process, I can attest to the importance of filling out the FAFSA diligently and on time. Missing deadlines could mean missing out on valuable aid, including grants and scholarships.
The only way to get a federal student loan is to fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA is the gateway form that lets you be eligible for federal student loans, as well as work-study and grants. Many schools even require the FAFSA to be eligible for their scholarships.
When you complete the FAFSA, you will find out if you’re eligible for Direct Subsidized Loans or Direct Unsubsidized Loans. Only students with demonstrated financial need can receive Direct Subsidized Loans. Otherwise, students can take out Direct Unsubsidized Loans.
Make sure to complete the FAFSA by the school’s deadline to maximize your chances of receiving other types of aid like grants and scholarships. Also, you will have to fill out the FAFSA every year you’re in school, not just your first year.
For graduate students, the decision between Direct Unsubsidized Loans and Grad PLUS Loans can be crucial. Drawing from personal experience, I recommend carefully assessing your financial needs and opting for Direct Unsubsidized Loans whenever possible due to their lower interest rates. However, Grad PLUS Loans can be a lifeline for covering the remaining expenses.
Direct Unsubsidized Loans have lower interest rates than Grad PLUS Loans, so make sure to max those out first. Grad PLUS loans let you borrow up to 100% of the cost of attendance so they can cover the remaining amount.
How to get a private student loan
Filling out a private student loan application is similar to any other kind of loan application. The main difference is that if you’re an undergraduate student or don’t have a source of income, you will probably need to add a co-signer, which is an adult who will be legally liable for your loans if you default or stop making payments.
Most students choose their parents as co-signers. If your parents are reluctant about being a cosigner, try to find a lender that offers co-signer release. This will let you remove the co-signer from the loan once you start making payments. Most lenders offer co-signer release after 12 to 24 months of payments.
If you find yourself considering private student loans, remember that choosing the right lender can significantly impact your financial journey. In my own student loan saga, I discovered the value of co-signer release options. Negotiating with hesitant parents became easier when they realized they could be released from their obligations after a certain number of on-time payments.
Private lenders each have their own loan application checklist, and it may be helpful to shop around with multiple companies to find the best rate. Also, make sure to compare prices every year. You never know which lender will offer a better deal.
Where to get a private student loan
Additionally, don’t underestimate the importance of shopping around for the best rates. Lenders often have unique perks, such as Earnest’s extended grace period or SoFi’s unemployment protection. These features can provide a safety net during unexpected financial challenges.
There are multiple different private student loan companies you can choose from, and they each have their own benefits and drawbacks.
For example, Earnest offers a nine-month grace period, during which time students will not have to make any payments. Most private student loan companies only offer a six-month grace period.
SoFi offers unemployment protection so borrowers can defer their payments if they lose their jobs. SoFi will also offer career consulting help so they can find their next gig.
Try to look beyond the interest rates to find a lender with other perks you can benefit from.
How parents can get student loans
Parents who want to support their children can take out either federal or private student loans for them.
Just remember, if you take out a parent student loan, the loan will always stay in your name, not your child’s. You can ask your child to repay the loan after they graduate, but the loan will still be your legal responsibility unless they refinance the loan in their name.
How to get a federal student loan for parents
If you’re a parent and want to take out student loans for your child, you can apply for a federal Parent PLUS loan. Just go here to apply. You should have already filled out the FAFSA for your child before applying for a Parent PLUS loan.
Parent PLUS loans will come with a credit check to make sure there are no major red flags on your credit report, like a lien or recent foreclosure. However, there is no minimum credit score you must have to qualify. Only parents of undergraduate students can take out Parent PLUS loans.
The biggest difference between regular student loans and Parent PLUS loans is that the annual limit is 100% of the cost of attendance, minus any other financial aid. That means parents can borrow much more than students.
These loans have some of the same benefits as regular federal student loans, but they may have limited access to income-driven repayment plans and forgiveness options.
Parents who take out these loans should know that there is no way to refinance a Parent PLUS Loan into a child’s name without turning it into a private student loan.
How to get a private student loan for parents
In some cases, parents may be able to find a better interest rate with a private student loan than a federal loan, especially if they have excellent credit.
To apply for a private parent student loan, visit each lender and fill out their application. If possible, try to get prequalified before applying to see what your potential interest rate may be.
For parents contemplating taking out loans on behalf of their children, understanding the nuances of federal Parent PLUS loans is crucial. Having successfully navigated this process, I emphasize the importance of considering the long-term financial implications. While Parent PLUS loans offer more significant borrowing limits, the responsibility falls squarely on the parents, with limited options for transferring the debt to the child.
Exploring private parent student loans is another avenue worth exploring. However, as a word of caution, I’ve seen parents underestimate the financial burden and assume their children will seamlessly take over the payments post-graduation. It’s essential to have open and honest discussions about expectations and financial responsibilities.
Not all lenders will offer student loans for parents. Before a parent takes out a private student loan, they should make sure they afford to handle those monthly payments. Many parents assume that their kids will be able to take over those payments once they graduate, but that’s not necessarily a given.
As you embark on your college journey and confront the reality of student loans, remember that knowledge is your greatest ally. By maximizing federal aid, strategically considering private loans, and involving parents in a thoughtful manner, you can pave the way for a more manageable and successful financial future. Your student loan journey is unique, and with careful planning, you can turn it into a stepping stone toward your broader financial goals.