The cost of college continues to increase and many students have the challenge of figuring how to afford them. Grants, scholarships and savings are the most effective place to begin. If they aren’t enough to provide the total costs of tuition, you may also consider taking out federal student loans.
A Guide to Taking Out Federal Student Loans
An Federal Direct Loan is generally an option for borrowers since they offer lower interest rates as well as certain protections for the borrower. Here is a brief overview of the five kinds of Federal student loans that you could apply for.
Direct Subsidized Loans
Directly subsidized loans can also be known as Stafford loans. The Direct Loan is typically granted based on the need of the borrower. Federal loans have a fixed rate of interest and the interest is paid even while you’re in the school.
There is no annual limit on borrowing for these loans. Below are the borrow limit for students who are independent or dependent:
- Freshmen: $3,500
- Sophomores: $4,500
- Juniors and seniors: $5,500
Direct Unsubsidized Loans
Direct loans that are unsubsidized aren’t granted based on financial requirements. However, this kind Federal student loans will start earning interest from the moment it is incurred. If you can, be thinking about paying off these loans while at school.
Direct loans without subsidies also have annual borrowing limits. These limits can vary dependent on the time of year and the extent to which your parents help you to pay for college.
Dependent Students:
- Freshmen: $5,500 in Direct loans combined
- Sophomores: $6,500 in Direct loans combined
- Juniors and seniors: $7,500 in Direct loans combined
Independent Students:
- Freshmen: $9,500 in Direct loans combined
- Sophomores: $10,500 in Direct loans combined
- Juniors and Seniors: $12,500 in Direct loans combined
- Graduate students: $20,500 annually
Direct PLUS Loans
Direct PLUS loan are specifically designed specifically for professional and graduate students. Parents PLUS loans can be provided to parents who help their children to pay for school.
In order to be eligible for this loan you’ll need to go through an examination of your credit. In the event that you do not have a previous credit score, then you may apply for the loan with a cosigner who is creditworthy.
Direct PLUS loans pay for the total cost of your education after you’ve taken out any grants or scholarships you’ve been awarded. There is a six-month grace period after your graduation, but you’ll have to start repaying your loans.
Direct Consolidation Loans
When you graduate and you’re left having multiple loans as well as federal servicers for student loans, think about taking out direct Consolidation loan. This will make several loans into one monthly payment.
This will not only make it easier to manage your student loan repayments however, you could also extend the repayment time by as long as 20 years.
How to Apply for Federal Student Loans
Before you can apply for federal loans for students, you have to fill out an application for free Federal Student Aid (FAFSA). It is the way that the U.S. Department of Education determines which federal grants or student loans you can qualify for.
It is possible to fill with your FAFSA for the year following beginning October. 1. You must fill out it before the June 30 date. But, don’t be a fool and wait until the last minute to submit the FAFSA. The earlier you submit your application more likely you are of being eligible for grants or other financial assistance.
In contrast to private loans, you won’t have to go through a credit screening for federal student loans in the majority of cases. However, you must satisfy the following criteria:
- Be a U.S. citizen or eligible non-citizen
- You must have a high school diploma or GED
- Enrolled at least part-time at an eligible college
- You can’t have defaulted on existing federal student aid
What are the Advantages of Taking Out Federal Student Loans?
Many borrowers are struggling to pay back their student loans following the completion of their studies. However, federal aid is accompanied by a number of protections for borrowers that help ease the burden.
Income-Driven Repayment Plans
Upon graduation, you’ll automatically be put on a standard 10-year repayment plan. However, if you are overburdened with federal student loans, you can apply for an income-driven repayment (IDR) plan.
These programs will limit your loan payments to a certain percentage of your discretionary income. Here are four types of IDR plans you can apply for:
- IBR: Income-based Repayment (IBR): IBR limits your monthly payments to 10 to 15 percent of your discretionary income. After a 20- to 25-year repayment plan, borrowers qualify for full loan forgiveness. Borrowers who took out a loan before July 1, 2014, qualify for a 10 percent interest rate. Anyone who takes out a loan after that date will receive a 15 percent interest rate.
- Income-contingent repayment (ICR): The ICR program limits your monthly payments to 20% of your discretionary income and sets the student loan repayment term at 25 years. There are no eligibility requirements and Parent PLUS loans qualify.
- Pay as You Earn (PAYE): PAYE is for borrowers who demonstrate some financial need. This program limits your monthly payments to 10% and sets the student loan repayment term at 20 years. But you need to be a new borrower by October 1, 2007 to qualify.
- Revised Pay As You Earn (REPAYE): This program is similar to PAYE except that all borrowers qualify regardless of when you take out the loan. It sets your monthly payment at 10% of your income, and undergraduates qualify for loan forgiveness after 20 years.
Loan Deferment or Forbearance
The borrower who is in financial hardship and aren’t able to pay the monthly payment may be eligible for federal deferment and forbearance. Both plans let you temporarily stop paying monthly installments on loans.
There’s only one difference when you defer, you’re not required to pay back the interest that accrues over the period of time. You may get in touch with your student loan servicer to determine whether you’re eligible for deferment.
Student Loan Forgiveness Programs
If you apply for federal student loans, then some of your loans may qualify for loan forgiveness. The U.S. Department of Education offers loan forgiveness for teachers, public service workers, veterans, and more.
Are Private Student Loans a Bad Idea?
When it comes to paying for college, scholarships, grants and federal loans are the best place to start. But for most people, this still leaves an inevitable gap in their funds. If you find yourself in this situation, private student loans may be a great way to fill those gaps.
Private student loans are offered by private lenders such as banks, credit unions or online lenders. You can use them to finance your undergraduate degree or pay for graduate school. Both students and parents can apply for private student loans.
There are many differences between federal and private student loans. Here’s what you should know before you start applying for a private student loan:
You Don’t Have to Fill out a FAFSA to Apply
Complete the free application to apply for Federal Student Aid (FAFSA) is required for those who want to be considered to receive financial assistance. However, this isn’t the case to private loans. In any case it’s a must to complete the FAFSA regardless. The FAFSA is the most likely to qualify for state grants and scholarships. It’s free money and will not require repayment following the completion of your studies.
You’ll Have to Be Enrolled At Least Part-time In an Eligible School
The majority of private lenders will require that you attend college at minimum part-time. You must also be enrolled in a qualified school. The majority of four-year institutions are eligible, however alternative schools, such as community colleges or trade schools, do not be eligible.
If you’re considering attending an institution of trade it is possible to locate a lender that provides loans specifically for your needs. If you want to know if your school is eligible for loans, you can contact your financial aid office as well as a private lenders for more details.
There are Credit and Income Requirements
In contrast to federal loans, you’ll be required to pass a credit test to be eligible to receive student loan. Private lenders will look at your credit history, income and the ratio of debt to income before approving the loan.
You May Have to Apply With a Cosigner
Unfortunately, most college students have a hard time getting financial aid on their own. Most college students just don’t have a strong enough credit history or proof of income, which is what private lenders require.
Applying with a reputable consignor is an option for you. In fact, more than 90 percent of undergraduate students applied with a co-signer during the 2019-2020 academic year. Of course, signing up for a private student loan comes with its own set of risks. That’s why you may be able to find a lender that will provide a guarantor release after a few years of on-time repayment.
Conclusion
If you’re thinking of applying for Federal student loans the best step is making the FAFSA. The FAFSA will help you get a clear idea of the kinds of loans and financial aid you can qualify for. If you’re still looking to fill in the any gaps in your funds borrowing from private lenders might be the best option. Just make sure you do your research and know what you’re getting yourself into.
