How to Choose Student Loans for Your Education

Getting accepted into college is an exciting milestone. But amid that excitement, there’s the stress of figuring out how to pay for higher education.

Getting grants and scholarships can lower college costs, but they don’t always cover your total expense. Applying for student loans can help you secure the aid you need to cover the gap. There are many types of loans available, but some serve specific needs and have pros and cons to consider. Here’s how to choose student loans that are right for you and what to know about them.

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Types of student loans

There are various types of loans that have different features and requirements. If you need to take out student loans, the first option to consider is federal student loans which are offered by the U.S. Department of Education. There are different federal student loan programs designed for specific borrowers, which we’ll discuss further below.

Federal loans are ideal as they come chock full of benefits such as student loan forgiveness, income-driven repayment options, deferment, and forbearance and have a low, fixed interest rate.

If you don’t qualify for federal loans or still need aid beyond federal loan awards, you can also apply for a private student loan through a non-government financial institution.

Subsidized Direct Loans

Direct subsidized loans are only available to eligible undergraduate students who illustrate a level of financial need. “Subsidized” means the government covers the interest charges on the loan during predetermined times. These periods include when a borrower is enrolled in school, during their grace period — generally, six months after graduation or leaving school — and during deferment.

These loans can be a good option if you qualify, but you must be an undergraduate student and have a financial need to qualify. Additionally, there are loan limits based on your year in school and whether you’re classified as a dependent or independent student. These limits can range from $3,500 to $5,500 per year for subsidized loans with a total limit of $23,000.

Pros:

  • Government pays interest at certain times.
  • Borrowers pay less in interest.
  • Low, fixed interest rate.
  • Eligible for student loan forgiveness under certain conditions (PSLF or IDR).
  • Repayment options such as income-driven repayment, deferment, and forbearance.

Cons:

  • Financial need is one of the eligibility requirements.
  • Only available for undergraduate students.
  • Has loan limits, depending on year in school and degree.

Unsubsidized Direct Loans

Direct unsubsidized loans have expanded eligibility. There is no need to show financial need to obtain this type of loan. Plus, undergraduate and graduate students qualify as well. The bad news? Unsubsidized loans don’t pay for any interest at all, ever.

On top of that, there are loan limits to contend with. Depending on the year of school you’re in, and if you’re a dependent or independent student, you could borrow from $5,500 to $12,500 in unsubsidized loans per year as an undergraduate student. Graduate students have a higher limit of $20,500 per year.

Pros:

  • All levels of students qualify.
  • Doesn’t have a financial need requirement.
  • Low, fixed interest rate.
  • Eligible for student loan forgiveness under certain conditions (PSLF or IDR).
  • Repayment options such as income-driven repayment, deferment, and forbearance.

Cons:

  • Borrower pays all interest, not the government.
  • Total cost of the loan might be higher.
  • Has loan limits, depending on year in school and degree.

Direct PLUS Loans

Direct PLUS Loans, which include Grad PLUS and Parent PLUS Loans, are designed for eligible graduate or professional students, or parents of dependent, undergraduate students. PLUS Loans can cover up to your cost of the attendance after subtracting any financial aid you receive.

They have steeper interest rates than other federal loans, but the rate remains fixed for the entire loan term. Unlike the other types of student loans, such as subsidized and unsubsidized loans that don’t require a credit check, both PLUS Loan options do require a credit check.

It’s still possible to obtain a PLUS loan if your credit isn’t so great if you get what’s referred to as an endorser, or cosigner. This person needs to have a good credit history and may be responsible for the loan in the event you skip out on paying. You may also share any circumstances out of your control that led to your negative credit history as well.

Pros:

  • Can borrow up to the cost of attendance after taking out what’s covered by financial aid.
  • PLUS Loans are eligible for forgiveness.
  • For Parent PLUS Loans, another benefit is it lets parents support their student’s education.

Cons:

  • Has a credit requirement.
  • High interest rates.
  • For Parent PLUS Loans, fewer repayment plans are available.

Private student loans

Given that unsubsidized and subsidized Direct Loans have specific loan limits based on your year in school and degree type, you might need to look elsewhere for financial help.

After taking out the maximum in federal loans — which is always recommended to do first — some borrowers may still have a gap in funding.

Private loans are designed to pay for what’s not covered by federal aid. Private loans might also be more accessible to undocumented students or students who didn’t complete a FAFSA. Financial institutions, online lenders or your local credit union might all act as private lenders and offer private student loans.

These can serve a much-needed purpose but also have some drawbacks. Namely, student loan forgiveness isn’t available, nor are income-driven repayment plans. Federal loans offer both, which makes them the recommended choice.

Additionally, you must have qualifying credit or a cosigner. Cosigners are typically co-applicants that have a good credit history and can help you with approval. However, it’s important to be aware that cosigners are also liable for your loan payments if you stop making payments.

Pros:

  • Covers the rest of education costs.
  • Can have a wide variety of lenders to choose from.

Cons:

  • Doesn’t offer loan forgiveness or income-driven repayment options.
  • Might have a variable interest rate that fluctuates.

How much should you borrow?

A common question with student loans is how much should you borrow? It really depends. In some cases, it can make sense to only borrow exactly what you need to cover costs and nothing more.

On the other hand, you might be offered more federal loans than you technically need. While you’re in school, it might be hard to build an emergency fund. Accepting your entire loan award can help cover any unexpected costs while you’re in school. However, be cautious because this strategy is risky if the money isn’t used responsibly.

Also, as noted above, the loan amount and type you qualify for might have limits. When it comes to private loans, it makes sense to only borrow what you need in this case, as there are no added protections for borrowers.

Borrow federal loan limits first, if you can

Federal loans should be your go-to option first, regardless of how much you might need to borrow. Why?

Because student loan forgiveness, income-driven repayment (IDR), and even loan cancellation are huge benefits when repaying loans. Through forgiveness programs, you can limit what you pay. IDR plans lower monthly payments, which is useful when you’re experiencing financial setbacks. Federal loans also generally offer relatively low fixed interest rates.

The case for maximizing federal loans

For some borrowers, it can make sense to accept the maximum federal loan award offered.

Borrowing the maximum amount might be a strategic move, for example, if you’re planning on a career in public service. You can get loan forgiveness on your remaining loan balance after making 120 qualifying payments (10 years) as a public service worker under the Public Service Loan Forgiveness (PSLF) program.

Not working in public service? You get forgiveness under IDR in 20 or 25 years but will pay more in interest.  Be aware that you may have to pay taxes on forgiven debt with IDR but not under PSLF.

Caveats to maximizing federal loans

Like anything, there are disadvantages to the “borrow-all” approach, too. Although you can always return the unused funds to your loan servicer, you might pay a little more interest than you would have otherwise.

Plus — there’s no way around the fact that accepting the maximum federal student loan limit with hopes of having them forgiven is a long-game strategy. It takes at least 10 years and as long as 25 years to be successful. If you’re not sure about your career goals or want to be student loan debt-free quickly, maximizing your federal loan award might not be the best route.

How to apply for federal student loans

If you’ve decided to apply for federal student loans, here are the steps to submit an application.

Step 1: Prepare documents

Before sitting down to apply for federal loans, having some important documents handy will help. Make sure you have your Social Security number (SSN), recent tax returns, and financial records like bank statements, W-2s and paystubs.

Step 2: Make a Federal Student Aid (FSA) ID

To do everything online, create an FSA ID. This makes it possible to e-sign important documents related to your loans. You’ll need your email address, phone number and SSN to get started.

Step 3: Submit your FAFSA

To receive federal loans, you must submit an application via the Free Application for Federal Student Aid (FAFSA). There are various deadlines including one that might come from your school or state, plus a federal deadline. Make sure you submit a completed application by these deadlines, so your application is reviewed for federal financial aid awards.

Step 4: Review financial aid

After completing the FAFSA, you’ll hear back with your financial aid options. If you’re eligible for a federal loan, you can review the loan offer and amount. To officially claim the federal loans, you need to accept your financial aid, select the amount you want and sign a Master Promissory Note (MPN).

The MPN is a legal document that you’re signing which basically says that you’re responsible for paying back your student loans and will make monthly payments.

After signing and accepting the financial aid, you’ll undergo entrance counseling. This helps you understand what student loan repayment might look like and the rights you have as a student loan borrower.

Step 5: Get federal loans

Your financial aid and federal loan disbursement will be sent to the school to cover costs and what’s left over will be disbursed to you.

How to choose a private student loan

Only take out a private student loan if you must. Make sure you’ve tried all of your options with federal financial aid. If you’re still coming up short, here’s how to choose and apply for a private student loan.

Step 1: Research lenders

Research lenders offering private loans for college. You can see if your bank or local credit union offers them or look into a number of online lenders. Write a list and compare rates, repayment terms, benefits and drawbacks so you can make your decision.

Step 2: Collect necessary documents

Private lenders want to assess your eligibility and ensure you can repay the loan. You might need to provide income verification documents such as pay stubs or tax returns. It’s also smart to check your credit report and score before applying to gauge your eligibility.

Step 3: Apply with a private lender

Figuring out how to choose student loans can take prep work, especially with private loans. After researching and collecting documents, apply with the private lender of your choice. The lender will review your application submission and get back to you with a decision. If approved, you might need to provide additional paperwork before the funds are disbursed.

The bottom line

Going to school and figuring out how to choose student loans can be overwhelming if you’ve never done it. There are many things to consider. Compare your options against your long-term goals, and use a loan repayment calculator to understand how your borrowing habits impact you in the future.


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VISIT EARNEST Fixed 3.22 – 13.24% APR2 Variable 2.55 – 11.44% APR2

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1Sallie Mae disclosures. Lowest APRs shown for Sallie Mae Loans: The borrower or cosigner must enroll in auto debit through Sallie Mae to receive a 0.25 percentage point interest rate reduction benefit. This benefit applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment, if available for the loan.
2Earnest: All rates listed above represent APR range. Rate range above includes optional 0.25% Auto Pay discount. Earnest disclosures.

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