The cost of attending college has grown at such a rapid pace, that a student loan is probably in your future. Getting a student loan isn’t the most difficult process in the world, but, knowing some things in advance could save a lot of time and frustration.
Read on to learn the basic terms, where it’s best to look first, and what you need to do to be able to apply for each type of student loan.
What’s what in student loan debt
College tuition is so expensive that the vast majority of Americans have to apply for a student loan in order to pay it off. What you sign now could determine many years of your financial future. So, read carefully to understand what you’re signing.
Terms for getting started
• FAFSA: The Free Application for Federal Student Aid is an online form administered by Federal Student Aid, an office of the U.S. Department of Education. College students who wish to receive federal student aid must complete the FAFSA every year.
• Federal Direct Loan Program: The U.S. Department of Education is your lender. This is the first loan you should try for. It’s almost impossible to not qualify, but depending on your eligibility, there are two primary types of Direct Loans: Subsidized ( for undergraduates, tied to financial need), and Unsubsidized (available to all eligible students).
• Private Student Loans: These are made by private lenders such as banks, credit unions, and fintech companies. Rates and terms will vary by lender, so not everyone qualifies for them. Private student loans are not eligible for federal loan repayment and loan forgiveness programs.
Terms for after graduation
• Student Loan Servicer: If you take out federal student loans, the U.S. government is your lender, but once the loans are disbursed, you will be assigned a loan servicer. With private student loans, your original lender will usually also be the one you make payments to after graduation.
• Student Loan Consolidation: If you have more than one federal student loan, you can consolidate them into a Direct Consolidation Loan. Private student loans can also be consolidated into one private student loan.
Terms to understand repayment plans
With private loans, repayment terms are established at the beginning, when your application is approved.
Federal Student Loans have several repayment plans and you can change the plan you’re on at any time for free. There is also no prepayment penalty for paying off your student loan early.
• Standard Repayment: A fixed monthly payment for a 10-year repayment term or a 10-30 year term for a Consolidation Loan.
• Graduated Repayment: Identical 10-30 year terms, but payments start out lower and then increase over time, hopefully in accordance with an increase in the borrower’s income.
• Income-Sensitive Repayment: Monthly payments are based on annual income but also keep pace to a 15-year term.
• Extended Repayment: If you borrow more than $30,000 in federal student debt, your payments will be fixed or graduated within a 25-year term.
Other terms you need to understand
Outstanding balance: An average outstanding balance is the unpaid, interest-bearing balance over a period of time.
Debt forgiveness: Debt forgiveness occurs when a lender forgives all or some of your outstanding balance on a loan. In regard to student loans, these programs only apply to federal student loan debt and involve you making your loan payments for a certain repayment period before the debt is forgiven.
How to get a federal student loan
If you need a loan to help cover the cost of a college or career school education your best option would be a federal student loan.
Both federal and private student loans must be repaid with interests, but federal student loans usually offer lower interest rates and have more flexible repayment terms and options. Your income and credit don’t matter with federal student loans and everyone pays the same interest rate.
Federal student loans are offered by the government to anyone who meets these basic requirements:
• Have a high school diploma or recognized equivalent
• Enrolled in a qualifying school at least part-time
• Be a U.S. citizen or eligible noncitizen
• Not in default with other federal aid
• Maintain a 2.0 GPA
• Registered with Selective Service (for males)
The first thing you must do to get a federal student loan is to fill out the Free Application for Federal Student Aid (FAFSA). Doing this, you provide information about your family and your finances that is integrated with the IRS, making it relatively easy to automatically obtain the bulk of the financial information you need about your situation and your parents’ situation.
With this, the school can assess your level of financial need and offer you an aid package that likely includes federal student loans. If you qualify for a subsidized loan, the government will pay your interest while you’re in school. Otherwise, with unsubsidized loans, the interest begins accruing immediately.
After you accept your financial aid package, including the loans, they will be paid for through the school, covering your tuition and other costs, before any remainder is passed on to you.
A new FAFSA has to be filled out every year that you want federal student aid. This may be a bit tiring, but the good news is, as long as you meet the requirements for federal loans, you’ll almost always qualify for federal funding.
How to get a private student loan
Your first choice should always be a federal loan, however, if after that you are still facing a college funding gap that needs to be filled by private student loans, these are the things you should know.
What are private student loans?
Private loans are made by private organizations such as banks, credit unions, and state-based or state-affiliated organizations, who impose stricter criteria than what you see with federal loans. You will probably need to prove your income and submit to a credit check, for example. Private student loans are generally more expensive than federal student loans, interest rates vary based on your credit score, and it’s possible to be denied altogether.
When should you apply?
The best time to apply is after you've made your school decision and once you know how much you need to borrow, so you don't have to submit separate student loan applications for schools you're considering.
What do you need to be able to qualify?
Every lender has its own application to fill out, but before you begin, it’s helpful to have the following items handy:
• Identifying information (name, birthdate, address)
• Social Security number
• Driver’s license number (or another state-issued ID number)
• Basic income information
• Information about assets and liabilities
• School you plan to attend
Different applications will ask for different information upfront, but eventually, you’ll probably need to share all of this information with a potential lender.
Once you choose the lender and fill out the application form, if you qualify, you’ll receive a loan offer. You can decide whether to take it after comparing offers from other private student lenders.
Most private lenders will send money directly to your school to cover various costs, and any excess will be passed on to you from the school. In some cases, though, the funds may be disbursed directly to you.