Considering how much college can cost, student loans are a necessity for a large portion of students. It's not exactly easy for the average person to spend $30,000 on school, and it's next to impossible when you're going to college immediately after high school, unless you've been saving since you were about five years old.
Fortunately, there are plenty of student loan options out there, so you've got good odds of financing your education if you know where to look. This guide will cover everything you need to know about taking out student loans, from what type of loans are available to the application process.
Federal and private student loans
If you're going to get one or more student loans, then you need to know what your options are. There are two basic categories of student loans: federal student loans and private student loans.
Federal student loans are issued by the U.S. Department of Education, and there are several loan options available. The Department of Education determines the types of loans you're eligible for and the amount you can borrow based on information you enter during your Free Application for Federal Student Aid (FAFSA®). Advantages of federal student loans include:
- They often (but not always) have lower interest rates.
- Most won't involve a credit check or require you to have a cosigner.
- There are income-based repayment plans available.
- They offer deferment and forbearance when borrowers can't pay. With private loans, this may or may not be an option.
- You may qualify for loan forgiveness, which is when any remaining loan debt is forgiven after you've made a certain number of payments.
Private student loans are issued by private lenders, such as banks and credit unions. Although these loans lack many of the federal loan benefits listed above, they also have a few advantages of their own:
- Approval for private loans isn't need-based like it is with federal loans, which could make it easier to borrow more.
- Amount limits are generally much higher with private lenders.
- Funding tends to happen more quickly with these types of loans.
Should you apply for federal or private student loans?
The standard recommendation with student loans is that you exhaust all your federal loan options first, and then move on to private loans if necessary.
Since you won't need to go through a credit check or find a cosigner for federal student loans, they're easier to get approved for. More importantly, you'll have the option of income-based repayment plans and the potential for loan forgiveness.
Given that private student loans lack those benefits, you should apply for those only if you've gotten all your potential federal student loans and you still need more money for school.
What to do before your loan application
Before you get to work on any student loans, you should:
- Estimate how much you'll need to borrow
- Check your credit and/or find a cosigner (if you'll need private loans)
Remember that you'll need to have money for more than just tuition. Books and other school supplies can also cost hundreds of dollars per semester. If you'll be going to school full-time and not working, then you'll also need to factor in your living expenses. It's a bit easier to estimate if you'll live on campus, as you can check the school's website to see how much a dorm and meal plan cost.
With private loans, the lender will use your credit score and income to determine whether to approve your application. If you have a good credit score and steady income, you could get approved on your own. Otherwise, you'll need to find someone who doesn't mind cosigning for you.
How to take out federal student loans
The federal student loan process isn't too difficult. Here's how you apply:1. Fill out the FAFSA®.
When you're applying for federal student loans, the bulk of the work is submitting the FAFSA®. You can do this online here on the FAFSA® site. While the application is straightforward enough, you will need financial documents for both yourself and your parents, including tax returns for the previous year and bank statements. The Department of Education uses this to determine how much aid you qualify for.
Pro Tip: You can fill out your FAFSA® as early as Oct. 1 of the year before you plan to attend school. Even though the federal deadline to submit your FAFSA® isn't until June 30 (state deadlines can be different), you should apply as early as possible. Some types of financial aid are limited and issued on a first come, first served basis.2. Wait for your financial aid award letter.
Next, you play the waiting game. The Department of Education will process your FAFSA® and send the information to the financial aid office of your college. The college will then send a financial aid award letter to you.
Colleges usually start sending out these letters in the spring around late March or early April. If you got your FAFSA® completed nice and early, be prepared to wait a few months to find out what financial aid you qualify for.3. Decide which loans you want.
Your award letter will include all the financial aid you qualify for, including grants, scholarships, work-study programs, and loans. Grants and scholarships are obviously the best options, because that's free money that you don't need to pay back.
For federal student loans, the award letter will list both the types of loans you can borrow and how much you can borrow.
You're free to accept any of the financial aid options you want. That could mean accepting every loan option listed, or picking one or two if that's all you need.4. Accept those loans through your school's financial aid office.
Once you've figured out which loans to accept, contact your school's financial aid office. You accept your loans through this office, and they will tell you what you need to do to receive your loans.
This typically involves completing a counseling session that ensures you understand the terms of your loan, and then signing a Master Promissory Note, which is where you agree to those terms.
Receiving your loan
Even though your federal student loans are through the government, your school disburses the funds to you. The dates when this happens vary by school, so you may want to check with the financial aid office.
Schools usually automatically take out funds to pay for your tuition, course fees, and room and board (unless you live off-campus). They then disburse the remainder of the money to the student directly.
How to take out a private student loan
Getting a private student loan is a bit different, as you might expect. Here's what you do:1. Research your private lender options.
With the number of private lenders you can choose from, it's in your best interest to check out several of them. Specifically, you want to find a lender offering a low interest rate, the term length you want, and none of those unnecessary fees that can drive your loan's cost up.2. Check loan rates with multiple lenders.
When you have a few lenders picked out, it's time to see what type of deal they'll offer you. Many lenders will show you potential loan rates you could qualify for on their sites, making this step a breeze.
Just go to each lender's site and provide some basic information, such as your name, date of birth, and Social Security number. The lender will do a soft credit check, which has zero effect on your credit, and then they'll show you what loan rates you can get with them.3. Pick the lender and loan you want.
Having seen what each lender has to offer, you should be able to pick out the best deal. Just make sure you understand all the details of each loan so you can make a fair assessment. For example, if you're deciding between loans with fixed and variable interest rates, it's important to realize that variable interest rates may start out lower, but can also increase later.4. Fill out and submit an application.
When you've chosen your private lender and loan, the final step is applying. Like checking loan rates, you can do this online, although it is a longer process. The application will require personal and financial information for both you and your cosigner (if you have one).
Receiving your loan
If the lender approves your loan application, the typical funding timeframe is two to eight weeks. There are two ways the lender can disburse funds, and the method will depend on the type of private loan you have:
- School-certified private loans -- Your school must certify the amount of your loan with the lender before funding. The lender sends the loan to your school, and your school applies the loan to your tuition, fees, and room and board (if you live on campus). Any additional money is sent to you.
- Direct-to-consumer private loans -- The lender doesn't need certification from your school regarding your loan amount, and they send the loan money directly to you.
Getting through the student loan process in one piece
It's certainly fair to say that the student loan process can be lengthy and even a bit stressful. There are all kinds of loan options to sort through, and both federal and private loans have their own application processes.
For the best results, try to get started early with your student loans. You could have more federal financial aid available that way, and it's a lot easier to make the right decisions about your student loans when you can afford to take your time.