Federal Student Loans Explained
Types of Federal Student Loans
The federal government awards two main types of student loans–subsidized and unsubsidized. For the 2017-2018 school year, both types had a 4.45% interest rate for undergraduates. Unsubsidized graduate loans had a higher rate at 6%. Along with these interest rates, federal student loans have an origination fee of 1.069%.
Subsidized Federal Loans
Subsidized federal loans are arguably the best student loans out there. They go to undergraduate students expressing a financial need, so they come with some financial assistance. The government pays the interest on these loans while you are in school and during your grace period after you leave school. Plus, the federal government covers interest payments during periods of deferment, and may also cover interest payments for the life of the loan depending on your repayment plan and monthly income.
Unsubsidized Federal Loans
Unsubsidized loans go to undergraduate and graduate students regardless of their financial need. These loans accrue interest while you are a student, but you do not have to make any payments until your grace period ends.
Benefits of Federal Student Loans
Along with their low-interest rates, federal student loans come with a number of other perks that you will not likely find in the private sector. The biggest include forgiveness programs, repayment plans, and death and disability discharge.
Forgiveness Programs
The federal government and several states offer student loan forgiveness programs. The biggest of these is the Public Service Student Loan Forgiveness program. This government initiative forgives the federal student loan debt of eligible borrowers who hold a public service position for 10 years. Another popular forgiveness option is the Teacher Loan Forgiveness Program.
Repayment Plans
The majority of federal loans made to students are eligible for one of the government’s six repayment plans. Two of these plans keep you on track to pay off your government loans in the normal length of time. The other four help lower your monthly payments and offer complete loan forgiveness after a set number of years. In some programs, subsidized loans are even eligible for interest forgiveness.
Death and Disability Discharge
If you become totally and permanently disabled or pass away, your federal loans may be eligible for complete forgiveness. Total and Permanent Disability Discharge and Death Discharge forgive the entire balance of your federal student loans. Plus, both programs are tax exempt.
Applying for Federal Student Loans
The Free Application for Federal Student Aid, or FAFSA, determines your eligibility for federal loans, grants, and scholarships. Simply file it online before your school’s, state’s, and the country’s FAFSA deadline in the spring. Even if you do not think you qualify for need-based financial aid, file your FAFSA each year. Many schools can only award scholarships to students with a current FAFSA on file.
Guide to Finding The Best Private Student Loans
Is a Private Student Loan Right For Me?
Given their higher interest rates and lack of forgiveness options, private student loans should be your last resort. Even the best student loans from private lenders cannot compete with the perks of federal loans. You should only take out private loans if:
1. You have filed your Free Application for Federal Student Aid (FAFSA) to see what federal financial aid or scholarships you qualify for
2. You have borrowed the maximum amount of unsubsidized and subsidized federal student loans
3. You have a strong credit score or a co-signer with a strong credit score
4. You only borrow the minimum amount needed to cover tuition and housing costs
Where to Find Private Student Loans
When it comes to securing private student loans, there is no one-size-fits-all private lender. The best student loans servicer for you may not be the best choice for your cousin. It depends a lot on your credit score, the amount of money you need to borrow, and where you currently bank.
In fact, your bank or credit union is the first place you should check out. Many offer perks in the form of reduced interest rates to current account holders. Although your bank/credit union should be your first stop as you search for the best student loans, it should not be your last. Compare it to other banks, credit unions, and private online lenders before making a decision.
Credit Unions
Credit unions are not-for-profit financial institutions designed to serve their members. They are more people-focused rather than bottom-line-focused. This is great news for you because credit unions typically offer lower interest rates or better terms than banks. Make note that your local credit union will not likely come up if you search online for low-interest student loans. Your best bet is to go directly to your local credit union’s website.
The only catch with credit unions is that you must become a member. Membership might require opening an account or paying a one-time membership fee of around $50 or less. You will also need to meet eligibility requirements like living in a certain area or working in a certain field.
Banks
Banks are for-profit financial institutions that serve people locally or nationally. They have no membership requirements, so you have a lot of options. Many banks offer a reduced interest rate for setting up automatic payments or if you (or your cosigner) hold another account at the bank. With banks, you will also have an easier time applying for and managing loans via online or mobile banking.
Online-Only Lenders
Now, it is easier than ever to find private student loan lenders online. These loan companies focus solely on disbursing and refinancing student loans. The majority offer flexibility with repayment terms, provide unemployment protection, and the option for cosigner release. If you do not have a cosigner, private online lenders are often your best bet for securing a private loan without a cosigner.
To help you get started with your search for the best student loans, we have created a widget that lets you compare top lenders. These companies go above and beyond to deliver excellent service, terms, and perks to student or parent borrowers.
What to Look for in a Private Student Loan
Unlike federal loans, private loans are competitive. This means that private loan companies offer varying interest rates, perks, terms, and repayment options. As a borrower, you have a lot of options, but it can make choosing a little overwhelming. Consider the following factors as you look for the best student loans.
Variable vs. Fixed APR
Private loans come with competitive interest rates that are either fixed or variable. Fixed interest rates may seem higher, but they remain steady throughout the life of the loan. This makes it easy to plan monthly payments and determine the full value of your loan before you commit to it. Variable interest rates typically start out lower, but they can change on a whim. This makes it hard to predict your future monthly payments and total loan cost.
Autopay Interest Rate Deduction
Many lenders offer a .25 to .50 percent discount for setting up autopay. This is an easy way to lower your loan’s interest rate. Plus, it ensures you will not miss any payments.
Fees
Some private loan companies charge an origination or disbursement fee. This additional fee is the percentage of your loan amount that you must pay when you take out the loan. Look for lenders that do not charge this fee as it can really add up.
Loan Term Length
Your loan’s term length determines the latest date you will become debt-free. It also determines your monthly payment amount. Fifteen years is common for most borrowers, but many lenders let you choose five or ten years. This can lower your interest rate and get you out of debt faster.
Forgiveness
The majority of private lenders do not offer loan forgiveness in any capacity. However, a select few offer disability and death discharge. These include Wells Fargo, Discover, Sallie Mae, and New York Higher Education Services Corp. Small local banks or credit unions may have this perk too.
Co-signer Requirement
Most lenders have minimum credit score requirements, so many borrowers need a cosigner. The cosigner, typically a parent or other adult relative, agrees to cover the cost of the loan if you, the borrower, default on your payments.
Cosigner Release
Cosigner release lets you relieve your cosigner of the financial responsibility associated with your loan. You typically become eligible for cosigner release after a set number of on-time payments. The number of payments required depends on the lender. Since this directly affects your cosigner, keep them in the loop as you look at loan options.
Deferment & Forbearance
Forbearance, or deferment, allows you to defer loan payments due to financial hardship for a set amount of time. Compare the number of months allowed for forbearance as you compare loan companies.
Additional Perks
Some private loans come with unique benefits. These should not take precedence over lower interest rates, but they can help you choose between similar lenders. Some lenders offer an interest rate or principal deduction upon graduation, unemployment protection, or financial counseling.
Student Loans are a Lifelong Decision
Finding a way to afford college is stressful, but you must approach it thoughtfully. It is all too easy to borrow money from the first lender you speak with. Spending a little more time shopping around for a better interest rate or terms could save you thousands of dollars over the life of your loan. This not only saves you money, but it also gives you more control over your life following graduation.
