Federal vs. private loans

After – and only after! – you have exhausted scholarship and grant opportunities, consider taking out a student loan. This will help to cover the balance after your grants and scholarships are applied.

Another option before you consider loans is a Federal Work-Study, which provides part-time jobs (both on- and off-campus) for students. Earnings from this position go toward your college tuition, helping cover gaps in funding. Like scholarships, grants, and loans, Federal Work-Study involves an application and acceptance process.

Federal student loans almost always cost less than private student loans, and have more protections when it’s time for repayment.

If you must borrow to cover the cost of your education, you should begin by applying for a federal student loan. Federal student loans are made or guaranteed by the Department of Education. They typically have names like Direct Loan, Stafford, PLUS, or Perkins; commonly, federally-backed student loans are better than private loans in several important ways:

• In some cases, the federal government will subsidize your federal student loan by paying the interest on it while you are in school.
• Your interest rate for a federal student loan is generally fixed, not variable. Private student loans can have fixed or variable-rate interest rates. A variable rate means that your interest rate and your payment amount can change.
• Federal student loans allow you to enroll in a repayment plan based on your income. This limits the amount you must repay each month, based on how much money you earn.
• Loan forgiveness on federal student loans may be available for nonprofit professionals after 10 years of working in public service.

The process for choosing your student loan:

Step 1. To be eligible for any federal student loans, work-study, or grants, you must complete the Free Application for Federal Student Aid (FAFSA). Submit the FAFSA as early as possible. Be sure to carefully review application deadlines. If you are having trouble filling out the form, you can contact the Department of Education.

Step 2. Explore your loan options. If you need to borrow to pay for school, federal student loans almost always cost less than private student loans, and have more protections when it’s time for repayment. Take subsidized loans first, if you are eligible.

Step 3. Shop around. If your aid package doesn’t cover the full cost of college, talk to your school’s financial aid office about scholarships or alternative loan options.

Tip: Fill out the FAFSA even if you’re not sure you’ll get the federal aid – schools often use it to award scholarships and other grant aid.

Some common questions about student loans

Q: How often do student loan rates change?
A: Once you agree to a federal student loan, your interest rate remains the same. Interest rates on private student loans are set by the lender, and depend on the lender’s evaluation of your creditworthiness.
Tip: If you are choosing between schools, compare each school’s aid offer.

Q: What’s the difference between subsidized and unsubsidized student loans?
A: The government pays the interest on subsidized loans while you are in school. With an unsubsidized loan, you pay the interest during that time. Subsidized loans are awarded to students based on financial need.
Tip: Shop for lower interest rates and flexible repayment options. Remember, your creditworthiness could affect the advertised interest rate.

Q: Should I use a credit card to cover my education costs?
A: No. Unless you can pay the balance each month, credit cards tend to be a more expensive way to finance your education, and they do not provide the flexible repayment terms or borrower protections offered by federal student loans.

Private student loans generally have variable interest rates, which can reset every month or quarter, causing your monthly payments (and total amount owed) to change.

Q: When are private student loans appropriate?
A: Consider a private student loan only after you have exhausted all other options. A “private” student loan is any type other than federal: They can be made by a bank, a credit union, a state student loan agency, or a college or university, and may also be referred to as “alternative” or “institutional” loans. A few facts to understand about them:

• They do not offer the flexible repayment terms or protections provided by federal student loans.
• Private student loans are not funded or subsidized by the federal government.
• Private student loans generally have variable interest rates, which can reset every month or quarter, causing your monthly payments (and total amount owed) to change.

If your grants, scholarships, and federal student loans are not enough to cover the cost of your education, you should consider cutting costs where you can, and see what your family can contribute. They may be able to get tax credits for their contributions.

Adapted from this this piece by the Consumer Financial Protection Bureau.

FOR MORE INSIGHT

On Federal Work-Study
Federal Work-Study jobs help students earn money to pay for college or career school (Office of Federal Student Aid)

On student loans
How do I apply for student loans (Consumer Financial Protection Bureau)
Paying for college (Consumer Financial Protection Bureau)
Student loans (Consumer Financial Protection Bureau)

On federal aid in general
Most people are eligible for financial aid for college or career school (Office of Federal Student Aid)
If you’re not ready to apply for federal student aid, but you’d like to estimate your aid, try FAFSA4caster (Office of Federal Student Aid)

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