As college costs continue to rise, fewer families are able to afford it. Fortunately student loans allow someone to complete their education and then pay for it later when they presumably have a better job than they could have gotten without a degree. Where should you go to borrow the money? There are a lot of options.
Every college student should complete the FAFSA, even if they don’t think they’ll qualify for assistance. If you’re lucky you may be eligible for grants or work to help pay for college. But almost certainly some aid will come in the form of loans that will have to be repaid. There is a wide variety of loans available, some more advantageous than others.
Loans available to students include the Perkins loan, Federal Direct subsidized and unsubsidized loans, and loans made to parents for the purpose of contributing to their child’s education. Interest rates on these loans can be as low as 5% or as high as 8% or more. Some of them also charge origination fees, based on a percentage of the loan amount.
What should you look for?
When you start looking over the terms of these loans, it’s easy to see when you need to start making payments. Many of them allow students to delay making payments until after graduation and a grace period. That’s good, but you also need to know when interest starts accruing. If interest is charged starting when the funds are disbursed, then interest is being added onto the balance of the loan all the time that you’re in school. In fact, now that the reduced interest rates on federal direct loans have expired, the main difference between the subsidized and unsubsidized loans is when interest starts accruing. On subsidized loans, you pay a one percent origination fee, and then no more interest accrues until after graduation. Interest on the unsubsidized loan starts accruing when funds are disbursed.
Why is it so important to find out when interest starts accruing?
Because interest rates are so low on other types of loans right now, there might be a better way to fund your education. Home equity loans usually have variable rates, but they’re currently around 4%. That beats the current rate on the federal direct loans. If you have equity in your home, another option is to refinance your first mortgage, taking out enough money for college. The disadvantage, of course, is that you have to make payments on these loans even while you’re in school. If you can manage that, though, non-student loans may be a better choice.
Most students who get loans to fund their education actually get a handful of small loans rather than one big loan. This is because most student loans, especially the best ones, have maximum annual amounts. When you graduate you can consolidate them all to make paying them off easier.
The right combination of loans will be different for each person, depending on what they qualify for and when they can start making payments. The first step is to line up all the potential loans by completing the FAFSA application and looking for other borrowing opportunities, including personal loans and home equity loans. Start by getting the loans that don’t charge interest while you’re in school. Even if the interest rate is higher, all that interest-free time is well worth it. You might even be able to refinance at a lower rate as soon as you graduate.
If you make wise borrowing decisions, you should be able to pay off your student loans quickly and have a lifetime of higher earnings in the career of your choice.
Student loans are available for all kinds of higher education. Some are specific to state colleges, private colleges or even online universities. Check with your school's financial aid office to find out what options are available for you.