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When it comes to financing your college education, borrowing money is one of the least appealing options. But for many students, it's unavoidable. According to the National Center for Education Statistics, 46% of the Class of 2018 attending public universities were awarded student loans, with a higher rate of borrowing at private nonprofit (59%) and private for-profit (65%) institutions.
For the vast majority of college students who need to borrow, getting a student loan through the federal government is almost always the best choice. But if you're a graduate student or a parent trying to help your child get through school, you may also want to consider private student loans.
Here's what you need to know about the process for each option.
How to Get a Federal Student Loan
Federal student loans are offered as financial aid through your school. Because they are funded by the U.S. Department of Education, federal loans come with certain benefits you won't get with private student loans.
That includes access to student loan forgiveness programs and income-driven repayment plans, as well as generous deferment and forbearance options.
The process of getting a federal student loan is relatively simple. You'll start by filling out the Free Application for Federal Student Aid (FAFSA). With this, you'll share financial information about yourself and your family to help your school's financial aid office determine how much aid you qualify for in the form of student loans, scholarships, grants and work-study programs.
Most federal student loans don't require a credit check, so you can even fill out the FAFSA with bad credit or no credit history. Only Direct PLUS Loans, which are available to graduate and professional students and parents, require a credit check. Even then, the government will only look for very specific negative items.
Undergraduate students with financial need may qualify for subsidized student loans, which means the federal government pays the accruing interest while you're in school, during the six-month grace period after you leave school and during deferment periods.
All other borrowers will get access to unsubsidized loans, where you're responsible for all the interest that accrues on the account. Undergraduate students might also get unsubsidized loans if they don't meet requirements for subsidized loans or have maxed out the amount they can borrow.
If you qualify for federal student loans, the terms—including the interest rate, loan fee and repayment period—are standardized, which means everyone who qualifies for a specific type of federal loan gets the same terms. For example, subsidized and unsubsidized federal loans issued to undergraduates from July 1, 2020, to June 30, 2021, have a fixed interest rate of 2.75%.
How to Get a Private Student Loan
Private student loans are generally less appealing than federal loans because they don't come with loan forgiveness programs, typically carry higher interest rates and rarely have the benefit of income-driven repayment plans.
But if you've maxed out your federal loan limits—there are annual and aggregate caps—or you're a graduate student or parent, they may be worth considering (especially if you have great credit).
Finding a private student loan involves applying with individual private lenders. Each one has its own criteria for determining eligibility and also its own set of interest rates, repayment terms and other features.
One of the drawbacks of private student loans versus federal loans is that private loans typically require a credit check. If you have excellent credit and a relatively high income (or a cosigner with both), it likely won't be a problem, and you may even be able to qualify for a lower interest rate than what the federal government offers on graduate and parent loans.
But if your credit history is limited or has some negative marks and you don't have a creditworthy cosigner, you may have difficulty getting approved.
The good news is that private student loan companies typically allow you to get preapproved before you submit an official application. This process requires just a soft credit check, which won't impact your credit score, and it allows you to see if you qualify and compare rate offers to ensure you get the best deal.
If you are eligible, the terms of your loan will vary based on your credit history, income and other factors.
Other Ways to Pay for College
While student loans can be a convenient way to help you get through school, reducing how much you borrow can make a huge difference for your financial security down the road. Here are some other ways you can pay for college that don't require you to pay the money back at a later date.
- Scholarships: Check your school's website to see whether it offers scholarships for academic, athletic or other reasons, and if you're eligible. Also, search for scholarships on websites like Scholarships.com and Fastweb. You'll be able to filter millions of opportunities to find ones designed for you.
- Grants: Part of the financial aid process includes grants for students who have the financial need, so filling out your FAFSA is always a good idea, even if you don't plan to borrow money. Also, check with your school and explore private scholarship websites to research other grants. Some grants may only be available to students involved with certain college programs, or in specific fields of study, so it might be helpful to ask a professor or academic advisor you think would be knowledgeable.
- Part-time work: If your class schedule allows it, search for on-campus or off-campus jobs to help you pay for tuition, fees or other educational and living expenses. Even if you only work a handful of hours a week, your income can add up over time and help you avoid thousands of dollars in debt over the course of your college career. Your financial aid package may include work-study programs for your college, which can make the process of finding a job easier.
It's also important to keep in mind that picking a less expensive school and looking for other ways to keep your costs down while you're in college can go a long way in helping you reduce your reliance on student loans.
Build Credit for Future Borrowing Needs
If you think you'll need to use private student loans at any point in the future, or you simply want to establish a credit history for when you need it after graduation, the sooner you start, the better.
While student loans can help with that, they won't do much until you start making payments, which won't happen for most until after graduation. Student credit cards can be a great way to build credit because as long as you keep your balance low and pay your bill on time and in full every month, you can avoid interest charges.
While you work to build credit, monitor your credit score regularly to keep track of your progress, and address any potential issues as they arise.