Overview

College is an exciting and new time for most of us. However, paying for it is another story. Thankfully, student loans and aid exist to help students pay for their education. Most students will need to borrow money to pay for school unless the parents were able to properly save enough money to pay for their education.

The cost of education has increased exponentially. Nowadays, most students cannot pay for college with just a part-time job. Back in the late 1970’s, students at state schools paid $1,200 for a year’s tuition and fees. Now, $1,200 will cover one semester’s worth of textbooks.

To pay for your education, you will most likely need to take out a student loan. This guide will walk you through getting a student loan and the differences between the loans available from the government and private companies.

Keep in mind that student loans, private loans, work-study programs, grants, and scholarships are all forms of student aid.


FAFSA

FAFSA stands for the Free Application for Federal Student Aid. This is a form you submit once per year in order to obtain financial aid from the federal government and your school. This form essentially asks a student about their current financial resources available to them. This includes your parent’s income, net worth, assets, and more.

To apply for FAFSA, you can simply go to www.fafsa.ed.gov. The FAFSA submission opening date can vary, so check online to see what the official FAFSA website says. It is important to know that FAFSA is a first come first serve service. This means that the later you apply, the lower the amount of aid you receive will be. If you have not filed a FAFSA before, submit it right when the website allows you to.

You will have millions of students trying to get money just like you. You must apply for FAFSA every single year you are enrolled in college and the year before you attend your first year at college.

If you are in high school, apply and submit your FAFSA application in your senior year. You most likely have applied to your top choice schools or at least know where you will be going by this time. On the FAFSA application, a high school senior will simply list all the schools they applied for or are trying to attend next fall. Your schools will receive your FAFSA form and will then calculate how much money you can receive from attending their school

Schools will also use the FAFSA form to see if you qualify for any grants (free money) or a student work program, which is usually a part-time campus related job. Your FAFSA application will take time to process. Once your information has been processed by the university, you can typically log into your schools “online portal” to see how much aid you have been rewarded. Our next section will discuss the various types of aid and loans available to you.


Federal Student Loans

Loans are the most common type of financial aid. The federal government has two student loan programs: The William D. Ford Federal Direct Loan Program and also the Federal Perkins Loan Program. First, we will touch on the William D Ford Federal Direct Loan program since it is the largest source of student loans.

A Federal Direct Loan is a lending program where the United States Department of Education is your official lender. There are 4 types of loans available under the William D Ford Federal Direct Loan program:

Direct Subsidized Loans

Also called Stafford Loans, a Direct Subsidized Loan is exactly what it sounds like. The US Government loans you the money at a subsidized interest rate. Just as with other forms of financial aid, eligibility for this loan comes from financial need as shown in your FAFSA filing. These loans are inexpensive and are the least expensive way to borrow money from the government.

They are referred to as “Subsidized Loans” since the Federal Government will be paying the interest on your behalf for at least half of the duration while you are in school. The federal government also pays for the interest on your loan during the “grace period” and in deferment.  To qualify, you must be a US citizen with a high school diploma.

You also must be a full-time student and not in default for any past student loans. There is no credit check or cosigner required for a direct subsidized loan, so this is ideal for families with less than perfect credit.

The benefit of a direct subsidized loan is that you do not have to repay this loan while you are in school. Typically, you are allowed a grace period of 6 months after graduation to find a job and start repaying your loans with interest. If you experience hardship post-graduation, there are many repayment plans available.

Interest rates on Direct Subsidized Loans are always fixed and will never change throughout the life of the loan itself. The federal government will reset interest rates for student loans every July, so your interest rate will depend heavily on the state of the economy as well. However, there are certain borrowing limits on direct subsidized loans.

First-year undergraduate students who file as “Dependant” can receive up to $5,500 per academic year. Second-year undergraduates can receive $6,500, while third-year students and beyond can obtain up to $7,500 per year. Unfortunately, graduate students cannot apply for unsubsidized loans.

Direct Unsubsidized Loans

Often called Unsubsidized Stafford Loans, Direct Unsubsidized Loans are federally issued student loans. These loans are available to both undergraduate and graduate level students. You do not have to show “financial need” in order to receive an unsubsidized loan from the government.

As the name states, these loans are not subsidized by the federal government. This means you will have to pay interest on the loan while you are in school. This is because no financial “need” is required for unsubsidized loans, meaning even wealthy families can apply. If you choose against paying interest while you are enrolled in college, the total interest will add up and will be added to your loan principal.

Just as with a subsidized loan, the interest rates for an unsubsidized loan will remain fixed throughout the life of the loan itself. You are also given the same grace period of 6 months after graduation to begin repayment of your debts. With this loan you must be enrolled at least half of the time in school that will provide you with a degree.

These loans are still low cost and carry low-interest rates. The same eligibility requirements for subsidized loans are enforced with unsubsidized loans, including being a US citizen or eligible non-citizen, a high school diploma, and no previous defaults on student loans. Annual loan limits are also higher under unsubsidized loans.

As a first-year college student, you can borrow up to $9,500. As a second-year sophomore, your amount increases to $10,500. As a junior and senior, you are eligible to receive up to $12,500 per year. Last, graduate students can borrow up to $20,500 per year of enrollment.

Direct PLUS Loans

Direct plus loans are another great way of borrowing money from the government to pay for your education. Just as the two previous loans, the Department of Education is your lender. With direct plus loans, you must be a graduate or professional student enrolled in an eligible school (most schools are eligible).

The program you are enrolled in must lead to a graduate or other professional degree. This loan is also often called the “Parent PLUS Loan” since parents of dependent undergraduate students can also apply for this.

The downside of Direct PLUS Loans is that a credit check will be performed. The borrower will be the one whose credit is checked. So, if you are a dependent undergraduate student, your parent’s credit score will be checked. If you are a graduate student, it will be your credit. If you have less than perfect credit and need a Direct PLUS Loan, you can get an endorser. An endorser is essentially a cosigner.

The endorser agrees to repay your debt if you stop making payments and default. Getting an endorser can be difficult, as they are essentially agreeing to pay your debt if you default with no upside.

If you are searching for an endorser, try sticking with close family and friends. A list of pros and cons for student loans with a graduation capHowever, you can also submit an appeal of extenuating circumstances to the Department of Education who can clear you of the credit check. If you decide to get an endorser, you must complete a credit counseling course on the studentloans.gov website.

With a Direct PLUS Loan, the maximum you can borrow is your schools cost of attendance minus the other forms of financial aid you have received. Again, the interest rates on your Direct PLUS Loan will always be fixed for the life of the loan. As with almost any loan, a loan fee is associated with a Direct PLUS Loan. This fee is deducted from your loan disbursement. Usually, the loan fee hovers around 4.6% of the total loan amount.

Direct PLUS Loans also have the flexible repayment method offered by the Subsidized and Unsubsidized loans above. If you applied for a Direct PLUS Loan as a student, you do not have to make any payments while you are enrolled in school. You are also given the same grace period of 6 months to start repaying your loan.

If you are a parent borrower, you will be expected to start repaying your loan as soon as the funds are deposited into your child’s college account. However, you can request a deferment while your child is enrolled in college. You can also receive the same 6-month grace period as well. Just as with an Unsubsidized Loan, you will have to start paying interest when the loan is dispersed.

Federal Perkins Loans

The Federal Perkins Loan program helps students with exceptional financial need. Unlike other student loans, not all schools participate in this loan program. With the Federal Perkins Loans program, the school becomes your lender, not the federal government. To receive a Federal Perkins Loan, you must be an undergraduate, graduate, or professional student. Your school’s financial aid office can also tell you if your school participates in the Federal Perkins Loan program.

To be eligible for a Federal Perkins Loan, you can be a full-time or part-time student. Certain income requirements will make you eligible for this loan program. The school will decide if they provide you with the loan by analyzing your FAFSA statement.

The Federal Perkins Loan disbursements depend on your financial need, the amount of aid you’ve received, and the amount of funds available at your participating school. Since funding is limited, not all applicants will receive a Federal Perkins Loan. In order to increase your odds, you must apply early on. Undergraduate students may borrow up to $5,500 per year through this program. The maximum you may borrow as an undergraduate is $27,500.

Graduate and professional students are eligible to receive up to $8,000 per year, and up to $60,000 during their education. The $60,000 also includes the Federal Perkins Loans you may have used during your undergraduate years.

As with all loans, the Federal Perkins Loan comes with interest tacked on, but with no fees. If you become delinquent on your payments, however, there could be a series of charges and penalties tacked onto your account. If you decide to get this loan, the school will apply the loan funds towards your tuition, fees, and room and board first.

Thankfully, Federal Perkins Loans have great repayment plans. If you attend school at least half of the time, you will begin to repay your loans 9 months after your graduation date. You also have up to 9 months to repay if you leave school or fall under half-time status. Ask your schools financial aid office how long of a grace period they will provide.


Private Loans

With funding for higher education slowly decreasing, many families are finding themselves to be “too rich for student aid and too poor to pay for college”. Thankfully, there are many types of private student loans available. These loans are open to undergraduate, graduate, and all other types of students. If you are a medical student, you can even find loans designed to help you get by while you complete your residency.

All private loans are issued by a bank or private lending institution. With Federal Loans, the department of education is your lender. Just as with Federal Loans, private loans can be used for almost anything related to school. This includes tuition, room and board, fees, books etc.

One key to remember with private student loans is to never borrow more than what you need. This money is supposed to be spent on education, not on vacations and fancy electronics. While Federal loans analyze your financial situation to see how much they will lend you, private loans are based on your credit and also your cosigner’s credit.

We recommend that you always look to obtain a federal loan first, as the interest rates are lower and the Federal government can be more lenient with missed or delayed payments than your local bank will be. Before you browse, ask your financial aid counselor for a list of private loan lenders that have worked with students in the past. When shopping around for a private loan, do your research and find the loan that best fits your situation.

Most lenders will allow you to apply for a student loan right from their website. Only apply for private loans after you have been accepted into your school of choice. This will save you loads of time when submitting different loan requests for different schools. There is no charge to apply for private student loans.

Many private lenders will require a cosigner, as your credit history may be limited. Typically, your parents will fill this role for you. If you decide to have your parents co-sign for you, be sure that they have their financial information ready. If you cannot have a parent cosign for you, consider asking another family member or a close friend.

After you finish applying for your private student loan online, you should receive an approval or rejection within 30 minutes. The lender will also ask you to electronically sign documents and accept specific terms.

Be slightly wary of private loans since most recent graduates actually have a hard time finding jobs after college. Estimates show that no more than 10% of your income should be spent on repaying your loans. Know that if you default on private student loans, they could potentially bring down your credit and your cosigner’s credit.


Getting Out of Student Debt

Today, Americans owe over $1.3 trillion in student loan debt, which has nearly doubled within the last decade. Although inflation has remained stable, the increase in tuition has skyrocketed.

This is due to millions of Americans returning to college. With nearly half of all 30-year-olds carrying some form of student debt, you may be wondering how you can climb out of this hole.

Cancellation, Discharged or Forgiven

If you have student loans issued by the government, there is a possibility of having them discharged, canceled, or even forgiven. These three terms mean you will no longer be required to repay a portion or even all of your student loans back.

When you take out a student loan, you are legally obligated to repay the loan. Even if you cannot find a job or are dissatisfied with the degree you paid for, the government will still require repayment.

The three terms: cancellation, discharge, and forgiveness all have the same meaning but in different contexts. For instance, if you suffer a permanent disability or your school has closed, this is referred to as a discharge. If you cannot make your student loan payments due to your job and income, this is cancellation or forgiveness.

Erase Student Debt

  • Bankruptcy and Student Loans
    Sadly, bankruptcy will not allow you to discharge your student debts in most cases. However, if you can prove that repaying the loan will strain you and your dependent’s financial resources significantly, there is a chance. Although the decision is up to the judge, you will have to show that repaying the loan will also not allow you to have a minimum standard of living. Getting student loans discharged in bankruptcy is rare, so have evidence to prove that repaying a student loan will cause financial disaster.
  • Borrower Defense to Repayment
    With so much money being poured into education, there are certain characters and entities looking to make a quick dollar. Had you attended a school that misled you by promising a high paying career or engaged in misconduct, your loans could be forgiven. If you believe you attended a school that fits this category, you can apply for a Borrower Defense to Repayment here.
  • Public Service and Teacher Loan Forgiveness
    Depending on your occupation, you could have your student loans forgiven. For instance, certain “Public Service” and educational occupations could qualify for forgiveness. For public service forgiveness, you must work for a qualified employer, which includes: any government organization, non-profit organizations, or any tax-exempt organization under section 501(c)(3). Certain volunteers with the Peace Corps or AmeriCorps are also eligible for loan forgiveness. For Teacher Loan Forgiveness, you must teach full-time for at least 5 consecutive academic years at a low-income school. This program could forgive up to $17,500 in any Direct Subsidized or Unsubsidized loans. To qualify as a “teacher”, you must have obtained a bachelor’s degree with full state certifications as a teacher.
  • Death and Disability
    All federal student loans will be discharged if the death of the borrower or the death of the student the funds were borrowed for. All debts will be erased once proof of death is submitted. All Parent Plus loans will also be discharged if the parent or student dies. A Total and Permanent Disability (TPD) will also allow you to discharge all of your Federal Direct Loans and Perkins loans. Usually, a detailed report from a doctor, Veterans Affairs, or Social Security will grant you the documentation you need to qualify for cancellation of your student loans.

Student Loan Repayment Plans

Thankfully, the Department of Education understands that many Americans are under a vast amount of financial pressure. The Federal Government offers multiple repayment plans to students that qualify

If you are overwhelmed with student debt and do not qualify for any of the above discharges, you may consider an income-driven repayment plan. Typically, an income-driven repayment plan will make your student loan payments a certain percentage of your income, roughly 10% to 25% in most cases.

You can apply for free here. The Federal Government offers a total of 4 income-driven repayment plans including

  • Revised Pay as You Earn Repayment Plan (REPAYE)The repayment period is 20 years with an undergraduate study and 25 years for a graduate or professional study. Usually, 10% of your income will go towards student loans under this plan
  • Pay as You Earn Repayment Plan (PAYE) With PAYE, you can expect to see 10% of your income go towards student loan payments over the course of 20 years.
  • Income-Based Repayment Plan (IBR) If you are a new borrower after July 1st, 2014, you will have up to 20 years to repay your student debt. If you are not a new borrower after July 1st, 2014, you will have up to 25 years to repay. This plan will allocate roughly 10%-15% of your income towards student loans
  • Income Contingent Repayment Plan (ICR) The Income Contingent plan will never use more than 20% of your income toward repaying student loans. It also allows borrowers up to 25 years to repay their student loans.

Getting your student loans discharged or forgiven completely is a hard task, but a repayment plan can allow you to pay off your student loans without affecting your quality of life.


Final Note

With so many new things, figuring out the road of student loans can be difficult. However, by educating yourself first on how student loans work you can avoid headaches later on. Remember to always try and apply for federal loans first before searching for a private lender, as Federal loan interest rates are always lower than those of private lending institutions.