The student loan process asks a lot from incoming college students. Before they even leave the comfort of their childhood home or take a single college class, they’re expected to make one of the biggest financial decisions of their life. Choose wrongly, and they could end up paying thousands or even tens of thousands more over the lifetime of the loan.
But figuring out your student loan options doesn’t have to be stressful, especially if you have a parent or guidance counselor to help. The first step is learning about the difference between private and federal student loans, and how these options apply to your situation.
How Federal Student Loans Work
About 70% of the class of 2018 took out student loans, with the majority being federal loans. Federal student loans are backed by the federal government, and as such offer special protections and benefits. Interest rates on federal loans are often lower than private loans as well.
Both students and parents can take out federal student loans. If your parent borrows federal student loans for your education, the loans will be in their name. The current limit for federal loans is $31,000 total. The maximum amount parents can take out in federal student loans is the cost of admission minus any other financial aid.
Federal student loans have many repayment options, including income-based repayment and extended repayment for 20 or 25 years. Federal loans are also easy to defer if you go back to grad school, have substantial medical problems or sign up for active military duty.
You can apply for federal student loans by filling out the Free Application for Federal Student Aid (FAFSA). This form will be sent to all the colleges you’re applying to in order to determine federal aid eligibility.
You can’t get a federal student loan without submitting a FAFSA first. Aid from universities is often given on a first-come, first serve basis, so it’s best to fill out the FAFSA as soon as possible. If you wait until the last minute, you may receive less than expected and have to resort to private loans.
Borrowers with federal student loans can apply for the Public Service Loan Forgiveness program, which forgives all remaining student loans after 10 years’ worth of payments. PSLF only applies to graduates who work for the government, a non-profit or another qualified institution. Private lenders don’t have PSLF or any other loan forgiveness options.
How Private Student Loans Work
Private student loans come from independent lenders outside of the federal government, including national banks, credit unions, and smaller banks.
You can apply for a private student loan directly through a lender or by using a site like Credible that submits applications to multiple lenders at once.
Most private lenders require a cosigner for student loans. A cosigner is a person, usually a parent in this case, who agrees to take over payments if the original borrower defaults on the loan. You may still be able to find a private loan without a cosigner, but your rates will likely be higher.
In some cases, interest rates on private loans may be lower than for federal loans. This primarily depends on your major, if you have a cosigner and what kind of term you selected.
Students can choose a private student loan with a fixed or variable interest rate. A fixed-rate loan keeps the same interest rate throughout the lifetime of the loan unless you refinance to a lower rate at some point.
A variable-rate loan means the rate can increase or decrease depending on the economy. These loans usually have an introductory interest rate that is lower than a fixed-rate loan, which can make them more tempting to those who don’t fully understand the difference between the two types of loans.
With a variable-rate loan, payments can go up suddenly. If you’re living on a tight budget after college, paying $50 more a month could mean the difference between making rent or not.
Most private lenders don’t offer multiple repayment options. If you’re having trouble making payments, it may be harder to get a private lender to work with you compared to a federal loan servicer. As mentioned in the previous section, private loans are not eligible for PSLF.
In general, you should only seek private student loans if you’ve borrowed the maximum amount in federal student loans, you’re not interested in PSLF or you qualify for lower interest rates.
How to Minimize Your Student Loan Debt
The best way to minimize your student loan debt is to fill out the FAFSA. Colleges use FAFSA information to decide which grants and scholarships you’re eligible for. If you’re attending an in-state school, your state may also have its own scholarship.
You should also apply for third-party scholarships, which you can find at the following sites:
Do your own research and look for scholarships that are specific to your interests, demographic information and future major. If you have a parent with a military background, look for scholarships for children of veterans. If you’re a journalism major, look for scholarships for journalism students.
A good scholarship application consists of a personal, well-written essay and strong recommendations from teachers, coaches, and other adults. Filling out the scholarship early will give you time to get your essay proofread and stake an early claim as a top-tier applicant.
Apply for every scholarship you’re eligible for, even if you may not be the strongest candidate on paper. Every dollar you receive in scholarship money is a dollar you don’t have to borrow, and many scholarships have surprisingly few applicants.
Scholarships aren’t just for new undergrads – upperclassmen can also apply for most scholarships. Once you’re enrolled, ask a college counselor if your school offers special aid to current students.
Try to borrow as little as possible, even if it means living on ramen instead of take-out. Pay for housing and living costs with your own income. Consider working a part-time job during the semester and a full-time gig during the summer.