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Let's face it: College is expensive. According to data from the College Board, the average annual tuition at a state public school is $23,890 for non-residents, while the average tuition at a private university is a whopping $32,410 per year. That doesn't even include other expenses like housing, books and food.
Not all families have the financial resources to pay for college with savings, and only some students are able to win scholarships. This leaves many college students needing student loans to help finance their education.
But student loans are a little more complicated than they seem: There are multiple types of federal loans, in addition to private loans, each with their own eligibility and borrowing requirements. Some federal loans are based on financial need, while others aren't. Only one type requires a credit check. Private loans, on the other hand, usually always require a credit check, which could mean you need a cosigner. So where do you start? Here's what you need to know about qualifying for student loans.
Who Qualifies for Federal Student Loans?
The government offers various types of federal student loans, each with different rules and requirements. Most don't require a credit check or cosigner. However, some are only available to students who can demonstrate financial need—in other words, they don't have another way to pay for college.
To qualify for a federal student loan, you must meet certain eligibility criteria, such as:
- You are a U.S. citizen or eligible non-citizen
- You have a valid Social Security number (with a few rare exceptions)
- You're enrolled or have been accepted as a regular student in an eligible degree or certificate program and are qualified to obtain that education (by receiving a high school diploma, GED or other allowed high school completion verification)
- You're making satisfactory academic progress
- You're registered with Selective Service if you're a male ages 18 to 25
- You're enrolled at least half time (for direct loans)
The interest rates on federal loans are fixed, and they're typically lower than you'll find with private loans. Another benefit of federal student loans is that you don't have to start repaying them until after you graduate. Some federal loans are subsidized, meaning the government pays the loan's interest while you're still in school.
Types of Federal Student Loans
Federal student loans come in several different flavors. Here are some of the most common types you'll encounter:
- Subsidized: These loans are for undergraduate students who demonstrate financial need, and depending on a few factors, the amount you can borrow ranges from $3,500 to $5,500 annually. Currently, the interest rate is a fixed 5.05%, though it can vary based on the disbursement date. Subsidized loans don't start accruing interest until after you leave school.
- Unsubsidized: These loans can be used for undergraduate, graduate and professional school, and they're not based on financial need. Unlike subsidized loans, these do start accruing interest while you're still in school. For undergraduate students, the amount you can borrow also ranges from $5,500 to $12,500 per year, though graduate and professional students can borrow up to $20,500 annually. The interest rate is currently 5.05% for undergraduate programs and 6.6% for graduate or professional school.
- Parent PLUS: These loans can either be used by graduate or professional students, or the parents of dependent undergrads, for any education expenses not covered by other means of financial aid. While you don't need to show financial need, you do have to undergo a credit check. The interest rate for PLUS loans is currently 7.6%.
Taking Out a Federal Student Loan
To apply for any aid, you have to fill out the Free Application for Federal Student Aid, also known as the FAFSA. By filling it out, you can also potentially qualify for other forms of federal, state and school financial aid. When you fill it out, you'll list the schools you're planning on applying to (or attending), and you must give information about your family's taxes and financial situation.
Once your FAFSA is processed, if you've been accepted to any of the schools you listed, those schools will then calculate your financial aid options. They'll send you an aid offer, sometimes referred to as an award letter, which will explain how much and what types of aid you're eligible for. In addition to federal loan options, you might also be offered other forms of aid, such as a work-study program or grants.
The timing is up to the school; some send out these letters as soon as the winter the year before you start school, while others don't notify until right before the school year begins.
If you receive an aid offer including a federal student loan and you want to accept it, you'll just follow the instructions in the letter. It might require filling out an online form, or you might have to mail it back. Then, to officially accept the loan, you'll have to sign a promissory note agreeing to your loan's terms and conditions. Some types of loans also require you to take entrance counseling.
The timing of when your loan is disbursed is up to your school, so contact your school's financial aid office for specifics, but there are some basic timing rules that can give you a sense of what to expect.
Private Student Loans
If you can't qualify for a federal loan or you need more than one can provide, you also have the option to take out a private student loan. However, there are some downsides.
Because federal loans are given out by the government, their terms and conditions are strictly regulated by law. For example, their interest rates are always fixed. Private loans are typically made by financial institutions like banks or credit unions, and the lender sets the terms. Because of that, interest rates tend to be higher and might be variable, and you probably won't get the benefits that come with some federal loans, like loan forgiveness programs.
Additionally, the only type of federal student loan that requires a credit check is a PLUS loan, but private student loans usually require an established credit history. If you don't have established credit yourself, you'll probably need a parent or other adult with a solid credit history to serve as your cosigner.
Understanding the Impact of Student Loans on Your Credit
It's important to know that taking out student loans does have a major impact on your credit, so you should only use them if you know you can repay them. Just like any other form of debt, your student loans will go on your credit report. The amount you've borrowed and your repayment history factor into your credit scores, even if your loans are deferred. This means if you apply for a credit card or another form of debt, lenders will consider your loans and your ability to repay them when deciding whether to extend you more credit.
If you miss payments or default on your loans, it will negatively impact your credit scores, which can make it harder to be approved for other credit in the future.
The good news is, student loans can also help you build credit. Paying your loan bills on time every month will show lenders you can handle credit responsibly, which could help you secure loans or credit cards in the future.
If your family doesn't have enough money to pay for college and scholarships aren't in the cards, student loans can be a great way to pay for your education. Just make sure you fully understand the requirements and terms of each loan, and be certain you can repay the loans since failing to do so can harm your credit.