Each year, 20 million students attend college in the United States. Approximately sixty percent borrow money to cover the expenses of tuition, textbooks and fees, yet most still feel uneducated when it comes to making a decision about which student loans to apply for and use to pay for a college education. Here are 5 things students need to consider when applying for student loans.
Know the Difference Between Federal and Private
In order to receive federal loans, applicants for aid must complete the FAFSA (Free Application for Federal Student Aid). Federal loans typically come with fixed, low interest rates. They are occasionally subsidized, meaning the federal government pays your interest on while you’re enrolled as a student or even for a period of time after you graduate college. Because of this, federal student loans can only be used for the cost of attending college. This includes your tuition, fees, books, supplies, room and board. Private loans, on the other hand, may be used to pay for additional student expenses like computer supplies, internet services, transportation and even parking on campus.
Research Other Types of Loans
Perkins Loans can provide a subsidized, low-interest solution to pay for college costs but are extremely limited. Making up only 2% of disbursed federal aid, Perkins Loans are reserved for students who demonstrate exceptional financial need.
Parent PLUS Loans allow the parents of undergraduate students to borrow federal loan funds at a fixed interest rate. They also have relatively high borrowing limits. Additionally, Graduate or professional program students can apply for a GradPLUS Loan at a fixed interest rate. It’s common for graduate students to maximize their Stafford Loans before borrowing GradPLUS Loans. Much like Parent PLUS Loans, GradPLUS loans have higher limits.
The #1 thing to do to ensure you save money on your student loans is to shop and compare interest rates before you sign on the dotted line. Shopping sounds easy enough, especially with student loan comparison tools like Achieve Lending, but say that by shopping for private loans you got an interest rate from a lender of 9%, The average student takes out nearly $30,000 and at 9% the student can expect to pay nearly $15,700 in interest over ten years, if it took them ten years to pay off the loan.
The same borrower who took out $30,000 at 7% interest annually would pay $11,800 over ten years, with a monthly payment of $350. For those interested in a lower monthly payment, this is a monthly savings of $30, or $360 each year that could be used to fund a savings account or contribute to retirement.
The difference in interest rates in our example shows a total savings on the loan of almost $4,000. Many students do not feel the need to shop for loans, but $4,000 for an afternoon’s worth of research is a lot.
Familiarize Yourself with Your Loan Terms
Be sure to know your interest rate, the loan term, your monthly payment, and to whom you need to make your monthly payments. Additionally:
- Be prompt. Make your payments on time EVERY time to avoid added interest and late fees.
- If you don’t understand the fine print, by all means – call the bank directly. You have a right to know your obligations.
- Ask about deferment options or seek credit counseling if needed.
Try to Cut Costs Where You Can
If possible, try to reduce the amount you owe by lowering the amount you need to borrow from the beginning. Here are a few suggestions:
- Apply for as many scholarships as you can
- Consider a school with lower tuition costs
- Think about schools in your area instead of out-of-state
- Pick up a part-time job on campus
- If you work part-time or even receive some birthday cash, put it toward paying back your student loan. Every little bit adds up.
Borrowers are always encouraged to shop for interest rates, do their homework, and get the total picture before signing on for a loan. If you’d like to play with the numbers, here is a calculator that can show you the amount of money you’ll save, and if you’re ready, you can also click here to begin shopping loan interest rates.
Allen Kors is the Founder and CEO of Achieve Lending, the first ever search engine for education loans. Designed to help both traditional and non-traditional students find the best student loans, Achieve Lending offers users a free online portal to search, find, and compare student loans, often in as little as 30 seconds.
Kors founded Achieve Lending at just 27 years old after six years of working in the finance industry. His resume boasts time spent at the world's premier financial firms, with positions in investment banking, private equity, angel investing, and consulting. After leaving his job in angel investing to pursue entrepreneurship and form his own financial technology company, Kors now aims to build the ‘Kayak' for education loans and empower Achieve Lending users by providing financial education on the loan process and terminology.