It’s no secret that the cost of college has skyrocketed to all-time highs. But when you’re planning your college career, those numbers become much more personal. Now, it’s up to you to create a strategy to pay for tuition, books, and room and board.
You’re facing a much more difficult battle than your parents faced. According to the National Center for Education Statistics, the average cost of a year’s tuition and fees at a four-year school was just $1,291 in 1977. Back then, your parents could work a part-time job and pay for school without taking on debt.
Today, a part-time job won’t cut it — $1,291 would only cover the average cost of your textbooks. That difference puts you in a unique and challenging situation.
To pay for your education, you’ll likely need student loans to cover at least some of the cost. There are many different forms of loans, but when it comes to student debt, federal loans usually offer more flexibility and lower costs to students.
Find out what federal student loans are available to you and what makes them so beneficial.
Student loan options
Hopefully, you’re able to qualify for scholarships or grants that you don’t have to repay. Although that aid can be a huge help, you still might need to borrow money to pay for the rest of your expenses. You have two choices: federal loans and private ones.
Federal student loans
Issued by the government, federal student loans are most students’ first choice to pay for school. They tend to have lower interest rates and more generous repayment terms than private ones. Moreover, you can qualify for most federal loans even if you have poor credit. Federal student loans don’t require a cosigner or guarantor for your debt.
If you qualify for a subsidized federal loan, the government will even help cover your interest charges. While you’re in school, your loans grow with interest. However, with a subsidized loan the government covers your fees while you study, which can significantly cut down how much money you’ll owe by the time you graduate.
Private student loans
If you’ve exhausted your federal aid options and still need more money to pay for school, private student loans are another option. Private student loans are issued by a bank, credit union, or private company, instead of the government. The interest rates, repayment terms, and rules of your loans will depend on the lender.
To get a private loan, you need to have an established credit history, a solid income, and a good credit score. If your income or credit score isn’t high enough, a lender may require you to have a cosigner — someone who will be responsible for payments if you fall behind.
With federal loans, the interest rates are fixed for the length of your loan. However, some private loans can have variable interest rates, which can fluctuate over time. That means your payment can increase if your interest rate rises.
Private loans are also ineligible for federal loan benefits, such as access to income-driven repayment plans or Public Service Loan Forgiveness.
Benefits of federal loans
Federal student loans have certain perks that can make it easier to manage your loans if you’re struggling to afford your payments or lose your job:
1. Income-driven repayment plans
If you can’t afford the minimum payment on your loan, you might be eligible for an income-driven repayment (IDR) plan.
There are four kinds of IDR plans:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
Under IDR, the lender sets your payment as a percentage of your discretionary income. If you experience big life changes, such as a pay decrease or the birth of a child, your payment will go down, too. Some people can qualify for a payment as low as $0 with an IDR plan.
After 20 to 25 years of making qualifying payments, the government forgives the remaining balance of your loan. The discharged balance is taxable as income, but having your loans eliminated can be worth it in some instances.
An IDR plan can be a short-term solution if you’re struggling with an entry-level salary or have a long-term approach to managing your debt. However, because you’re stretching your repayment period over two decades or more, you’ll likely pay more in interest over the life of your loan.
2. Deferment and forbearance
If you can’t keep up with your payments, you might qualify for deferment or forbearance. Either option allows you to pause payments on your loan without penalty. If you lose your job or became seriously ill, you can delay making payments while you recover.
While deferment or forbearance is not ideal, it can be useful when facing an emergency that makes managing your loan payments difficult.
3. Student loan forgiveness programs
Some student loan forgiveness options are only available to those with federal student debt. If you work in public service, for example, the government offers programs that allow your loans to be forgiven.
Those that work for nonprofit organizations or the federal or state government may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you hold a qualifying job for 10 years and make qualifying payments, you could have the remaining balance of your debt forgiven.
Similarly, various federal loan forgiveness programs for teachers could mean big savings on student debt. Depending on your eligibility, you could have part or all of your loans forgiven after teaching for one to five years in a qualifying role.
4. Student loan discharge programs
With private loans, if your school lied to you about your chances of a successful career, the university closed, or you became disabled, you still have to make payments on your loan. They are not eligible for discharge, so you’re stuck with them no matter what.
Federal loans are different. There are several discharge programs that the government designed to protect borrowers. For example, if you become permanently disabled, the government might forgive your loans through Total and Permanent Disability Discharge. If your school closes suddenly while you’re still pursuing your degree, you could be eligible for a Closed School Discharge.
Hopefully, you’ll never have to rely on one of these discharge programs. But if something awful happens, it’s good to know about the safety nets available for federal student loans.
Types of federal loans
Currently, there’s only one federal loan category that’s distributing new loans: the William D. Ford Federal Direct Loan Program. Within that program, there are different loans designed for specific school levels and incomes.
1. William D. Ford Federal Direct Loan Program
The William D. Ford Federal Direct Loan Program is the largest federal student loan program. It’s made up of four different loan types:
- Direct Subsidized Loans: These loans are designed for undergraduate students with financial need. You can take out up to $5,500 each year to pay for school. Unlike other loans, you’re not charged interest on the loans while you’re in school.
- Direct Unsubsidized Loans: Unsubsidized loans can be used by undergraduate, graduate, and professional degree students. You can take out a maximum of $20,500 each year to pay for school, and interest accrues on your account while you’re in school.
- Direct PLUS Loans: A federal Direct PLUS Loan is for parents of undergraduate students paying for their child’s education or for graduate or professional degree students paying for their own education. You can use a federal Direct PLUS Loan to cover the total cost of attendance.
- Direct Consolidation Loan: If you have other forms of federal loans, you can consolidate them into one loan and one easy payment with a Direct Consolidation Loan. And, if your current federal loans are ineligible for PSLF, you can consolidate them with a Direct Consolidation Loan to qualify.
2. Federal Perkins Loan Program
In the past, Federal Perkins Loans could be used by undergraduate, graduate, and professional degree students with financial need. However, the program expired September 2017. The government will no longer issue new Perkins Loans.
Previously, Perkins Loans were a smart choice because they had lower interest rates than other loans. Eligible borrowers could get a Perkins Loan at 5% interest.
However, not everyone qualified for a Perkins Loan. It was dependent on your financial need and the availability of funds at your chosen university. In addition, there was a cap on the amount you could borrow. Undergraduate students could borrow up to $27,500 in their lifetime; graduate students couldn’t exceed $60,000.
For those who took out Perkins Loans in the past, the school you attend is the lender of the loan. You will make payments directly to the school or a servicer they appoint.
Federal loan interest rates
While private loans’ interest rates are determined by market conditions, the U.S. Congress sets the interest rates for federal student loans. They determine the rates based on legislation linked to the financial markets.
Interest rates can vary from year to year, but your interest rate is locked when the lender disburses the loan. It cannot be changed unless you pursue student loan refinancing.
The interest rates for federal loans disbursed between July 1, 2017 and July 1, 2018 are as follows:
- Direct Subsidized: 4.45%
- Direct Unsubsidized: 4.45%
- Direct Unsubsidized (graduate or professional degree): 6%
- Direct PLUS Loans: 7%
To get a federal student loan, borrowers must complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is what schools and states use to determine the aid you receive, including federal grants and loans. You cannot get a federal loan without completing the FAFSA. You’d otherwise have to use private loans, which can be more expensive.
The FAFSA has to be completed and submitted every year for you to remain eligible for federal aid. Even if nothing about your situation has changed, you still need to submit it again.
You can complete the FAFSA online. The application opens on Oct. 1 each year and submission deadlines vary based on your school and state. It’s a good idea to complete it as soon as possible each year.
Taking out loans for school
Trying to figure out how to pay for school can be overwhelming, but federal student loans can be a useful tool to finance your education. Thanks to lower interest rates and more repayment benefits than private loans, you can better manage your student loan debt going forward.
To reduce your need for federal or private loans, research and apply for grants to help limit your education costs.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.82% – 12.82%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|3.88% – 12.88%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.04% – 12.01%9||Undergraduate, Graduate, and Parents||Visit Citizens|