Navigating Student Loans: What You Need to Know Before Applying

Quick Highlights:

• Create a college financing plan to limit debt.
• Understand federal vs. private student loans for better options.
• Federal loans offer fixed interest rates and flexible repayment.
• Private loans need a good credit score or co-signer.
• Apply for student loans via FAFSA and explore grants and scholarships.

As you begin searching for the right university and degree program, it’s important to prepare a college financing plan. While education loans are an incredibly common part of paying for school, you ideally want to limit the amount of debt you take on as much as possible.   

Different student loans vary in their interest rates, benefits, and availability, so you should work with your school’s financial aid department to learn more about what each loan program entails.  To get started on this journey, continue reading to learn about the difference between federal student loans and private student loans.

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Understanding Student Loans

Most students begin college right after graduating from high school. Because of this timing, many students lack the funds to pay for school on their own. Student loans fill the gap and allow students to get an education. 

With federal loans and some private loans, you don’t have to repay your education loans until you’ve graduated school. This allows you to focus entirely on your education so that you can land a successful career once you are done with school. 

It is important to understand that all types of student loans require repayment. Managing student debt is important because you’ll eventually have to repay it after graduation. If you are able to access grants and scholarships, you should max out these alternatives and reduce the amount of student debt you take on.     

Types of Student Loans

Before you research how to apply for student loans, spend time learning about the different types of student loans. Currently, the average student loan balance on federal student loans is $37,088. This level of debt can be challenging for graduates because it limits their financial stability and their freedom to pursue different career tracks. 

Fortunately, there are ways you can make your debt burden more manageable. Other than looking at federal student loans, you should also consider loan repayment options, interest rates on student loans, and alternative financial aid for college.    

Federal Student Loans 

Federal student loans are available with fixed interest rates, so you don’t have to worry about the interest changing after you agree to the loan. Additionally, this kind of debt comes with more favorable loan repayment options. For instance, public service loan forgiveness (PSLF) allows you to get your loan forgiven after you’ve made 120 qualifying payments. 

As you look at your student loan eligibility and financing options, review the following types of federal student loans.    

Direct Subsidized Loans: Undergraduate students can obtain direct subsidized loans for up to $5,500. The Department of Education pays the interest on subsidized loans while you’re in school, for six months after you graduate, and during any deferment periods.    

Direct Unsubsidized Loans: You can get these student loans for up to $20,500 for undergraduate, graduate, and professional programs. 

Direct Plus Loans: PLUS loans are borrowed by graduate students or parents of undergraduates. 

Private Student Loans

Unlike federal options, private student loans are available to all students. When you turn in your Free Application for Federal Student Aid (FAFSA), the government calculates your expected family contribution (EFC) and financial need. Based on your eligibility, you may be offered subsidized or unsubsidized loans. 

If you don’t get federal education loans, you can turn to private loans instead. Make sure you understand the pros and cons of student loans before applying for a private loan.

• Private loans may be available at fixed or variable interest rates. 
• The loans are made by a lender, bank, or private institution. 
• Private student loans don’t offer federal loan benefits, like student loan forgiveness programs. 
• To be eligible for these loans, you may need to have a certain credit score or a co-signer.
• While some private loans allow you to defer your payments until after you graduate, many of these loans require you to make payments while you are still in school.
• If you need student loan refinancing, federal loans can be consolidated into a Direct Consolidation Loan. Private loans can’t be consolidated in the same way, but you can refinance them.
• While federal loans allow you to change your repayment schedule if you’re struggling financially, private loans don’t have the same repayment benefits. 

How to Apply for Student Loans

Typically, the college financing process begins with FAFSA. This application will determine your student loan eligibility. The following list is the basic process for applying for FAFSA.

• Gather your financial documents, such as tax returns, bank statements, and pay stubs. 
• Fill out the FAFSA form. 
• Review the FAFSA summary to confirm that everything is correct. 
• Respond to the offer of aid that you receive. 
• Get financial aid. 

If you don’t qualify for financial aid for college, you can still get private student loans. Typically, you’ll need the following things to get a private loan. 

• The lender will expect a good credit score or a co-signer. 
• You’ll likely need to have a low debt-to-income ratio. 
• You must show the lender that you are enrolled in a degree-seeking program.
• To get the loan, you’ll need to provide additional documentation, like pay stubs, bank statements, or college transcripts.  

Pros and Cons of Student Loans

There are many pros and cons of student loans you should consider. Before you apply for college financing options, consider the following advantages and disadvantages of getting a student loan. 

Advantages 

When you get a student loan, you can enjoy some of the following benefits. 

• You can sign up for manageable repayment options instead of paying for all of your schooling at once. 
• Student loans can give you access to education that you wouldn’t otherwise have. 
• Depending on the loan and the career you choose, you may eventually qualify for student loan forgiveness.
• Some loans can be refinanced or consolidated to make them easier to pay.

Disadvantages 

While there are benefits to education loans, there are also some drawbacks you should keep in mind. 

• A student loan can lead to long-term debt that is difficult to repay. 
• You may accumulate interest while you are in school, which can increase your loan balance. 
• A student loan can negatively impact your credit score and debt-to-income ratio. 
• Your career options may be limited. For example, you may be unwilling to start your own business or take a low-paid opportunity because you have to pay your loans back.

Loan Repayment Options

The type of loan you get will greatly determine your repayment plan. With student loan refinancing, you can consolidate your loan and potentially get a lower payment. Deferment and forbearance can help you postpone loan payments temporarily. If you qualify for deferment on direct loans, you don’t have to pay any interest during the deferment. 

Additionally, you can use standard repayment plans, graduated repayment plans, and income-driven repayment plans to change how you pay your loans. Graduated repayment plans allow you to start with low payments that gradually increase over time. Meanwhile, income-driven repayment plans determine your loan payments through your income. 

Loan Forgiveness and Assistance

Federal programs, like PSLF and Teacher Loan Forgiveness, will repay your loans based on how long you work in public service or teaching careers. Sometimes, states offer their own assistance programs. 

Because these programs tend to have highly specific eligibility requirements, you should look up the rules while you are still in school. Where you work, the type of loan you get, and other factors may determine whether you get your loan forgiven or not.   

Managing Your Student Loans Effectively

Because of how capitalized interest works, your debt can quickly snowball if you don’t make regular payments. For help managing student debt, use the following tips. 

• Create a budget to help you prioritize debt repayment. 
• Pay more than the interest amount each month so that you can pay off the principal. 
• When you get windfall money from things like tax refunds, use it to pay extra on your student loans. 
• Plan ahead for how you will pay off your loans. Look at your expected career field to forecast how much you will be earning. 
• Reach out to your financial aid department for financial advice and support.  

Find Out How to Pay for School 

While taking on too many student loans can lead to financial issues, education loans are an important part of the college financing process. If you don’t have other ways to pay for your degree, federal student loans and private student loans can be a viable option. The most important thing is learning how to manage student loans and minimize your debt amount.