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Student Loans: Federal vs. Private

Student Loans - Everyone has their own opinion on this and it's great to hear everyone's opinion because they can all be so different. I believe if you are in a position where you are looking at student loans, it should start with your family (personal) philosophy on the importance of the college aged years. How important are these years in the growth of a person. In many cases a loan is unavoidable if you want to go to college, with even a semester of community colleges costing thousands of dollars these days, college affordability often makes a big difference in where students are able to go to college. Luckily, you can usually bring those costs down with federal aid and scholarships but when you need to fill in the gaps, as long as they are reasonable gaps, there are several student loan options out there to help you pay college bills.

Here’s an explanation of the types of student loans you might encounter once you get started. I know there are parents of juniors, sophomores and freshman out there that are saying "I don't need to read any further, I'm not going to go the student loan route, if he doesn't get enough of a scholarship, he is not going to that college." Well that mentality is counter productive to the process. Learn about everything you possibly can, understand all that you can about the process and never think that anything is impossible or won't happen until you are actually there, because you never really know until you go through it. Also, in the event you do not need to a loan to pay for college, maybe it is a great time to have him take out a loan, build credit and learn about the responsibility of paying the bill, (because it will be his). So please humor me and keep reading!

There are four major types of federal student loans. Then there are private loans. And if you’re thinking about borrowing money for college, you need to know about all of them. Please understand that a federal student loan and a private student loan are completely different so be sure to do your homework and understand what you are getting into.

Federal loans

First things first: to qualify for any federal student loan aid, you must fill out the Free Application for Federal Student Aid (FAFSA) every year. The FAFSA gives the government an understanding of you and your family’s income, expenses, and projected college costs. It then uses that information to determine how much federal aid you’ll qualify for. The FAFSA is free, but you have to meet deadlines. You should submit your completed FAFSA ASAP after October 1 each year using the previous year’s tax returns.

Using information from the FAFSA, the US government issues different types of federal loans. You can't request one loan over another, but you'll find out what you're eligible for on the financial aid award letter that comes from colleges that accept you. Also keep in mind that there is a maximum on how much you can borrow in federal loans each year.

Here’s a look at the main types of federal student loans available to college students. I'll keep it brief but as always if you have questions - just ask me!

Direct Subsidized Loans

These loans are for students with demonstrated financial need. They accrue interest at a fairly low rate. Subsidized means that the government—not you, the student—pays all the interest that accrues during the time you're in school. That can save you a lot of money in the long run.

Direct Un-subsidized Loans

Un-subsidized loans aren’t based solely on financial need. They’re useful if you just don't have quite enough money on hand to pay for school but don't qualify for financial need by government guidelines.

Direct PLUS Loans

If your loans aren't enough to cover your need, your parents can take out PLUS loans to cover education costs.

Federal Perkins Loans

Federal Perkins Loans are excellent choices for students with great financial need. These loans have a fixed 5% interest rate, and you can borrow up to $5,000 each year. However, not all colleges participate in this program, so check with your school.

There are some other ways to get money - Federal Work-Study

Some students qualify for federal work-study from their college, which seems like a loan but is more of an award. Work-study is a program in which a student can work at a designated campus job and get a paycheck for the work. The amount is considered financial aid, but the family is required to pay the money upfront as part of their college bill. As the student earns the paycheck up to the total amount, the student/family decides how the money is spent, whether it’s to pay tuition or as spending money.

Private loans

Private loans through banks or private lenders help families bridge the gap between federal aid and what they need to actually pay their tuition bill.

Private loans can vary dramatically in terms, from their interest rates to repayment schedules. Typically, private loans have higher interest rates, require a parent or guardian to cosign the loan, and sometimes require payments as soon as the first payment is made to the school. Though you can certainly get private student loans for reasonable rates, in general, they should be seen as a “last resort”

Student loans can be helpful in paying for college, but they’re not something to take lightly. Before taking out any loans, be sure to learn all you can about what borrowing entails.

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