How will you pay for your college education? You can (and should) start with free money whenever possible; search out all the scholarships and grants you can find. But be prepared to add loans to your list of aid possibilities. It’s true this type of aid is not free (you’ll have to pay it back when you graduate), but the terms of many loan programs are quite favorable. Responsible borrowing for education is a great investment.
Consider some of the primary sources of loans available to you and your family.
Stafford Loans are the most common type of student loans, and everyone can participate. If you have financial need (as determined by the results of your FAFSA) you’ll be eligible for a subsidized Stafford Loan. For this type of loan, the government will pay the interest that accrues while you’re in school. If you don’t have financial need (as determined by the FAFSA), you can still get a Stafford Loan—however your loan will be unsubsidized, meaning you are responsible for paying the interest that accrues while you’re in school. You can choose to defer this interest while you’re in school and add it to the principal of the loan; this may sound like a good idea when you’re a poor college student, but keep in mind that this will increase your loan payments once you graduate.
So, how much can you borrow? As a first-year student you can borrow up to $5,500 (up to $3,500 of which can be a subsidized loan, if you qualify). The loan limits increase for upperclass students: sophomores can borrow $6,500 (up to $4,500 subsidized); juniors and seniors can borrow $7,500 (up to $5,500 subsidized). Moreover, first-year independent students or dependent students whose parents are denied a PLUS loan (detailed below) can apply for an additional $4,000 in unsubsidized Stafford Loans to help cover their bills. The relatively low interest rates and favorable repayment terms of Stafford Loans make this a good place to start borrowing and an ideal way for you to begin establishing credit.
Perkins Loans are offered to students who display great financial need as a result of their FAFSA calculations. Hint: If you’re eligible for a Pell Grant, you’ll likely qualify for a Perkins Loan, which has a fixed interest rate of five percent and deferred repayment of principal and interest until nine months after graduation. These loans come with some of the best terms available and offer a good way for students to borrow.
The PLUS Loan for credit-worthy parents of dependent students is another option to help pay for your education. Your parents may take advantage of this federal program to borrow all or any part of your out-of-pocket expenses that remain after other aid is deducted from the bill.
Private loans are also available, with varying terms and limits. You may need a credit-worthy cosigner in order to borrow a private education loan, and you can typically borrow all or any part of the funds needed to cover your college bills.
Regardless of your borrowing needs, you should talk with the colleges you are considering about loan processing procedures and the particular programs and lenders most commonly used there. Be sure to educate yourself about the options, limits, interest rates, and repayment plans so you can make the best choices for your future.