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Shopping for Student Loans

The cost of attending college has grown dramatically in the past 25 years. Students are faced with the decision every semester of how to pay for the cost of tuition, room and board, lab fees, and books. Nearly 70 percent of students in 2018 took out student loans to pay for these expenses. They may have used a mix of federal and private loans in conjuncture with grants, scholarships, money from parents, and/or part-time work to cover their total educational costs.

If you think you’ll need student loans to help pay for college, be sure to shop around for the best terms and interest rates. Below is an overview of federal and private loans so you can make the best decision for you.

Federal loans

To apply for federal student aid, including loans, you will need to complete the Free Application for Federal Student Aid (FAFSA), either online or via mail. It will take some time as it requires tax and income information to complete, but it’s free.

All federal loans have fixed interest rates set by Congress, which means the interest rate won’t change over the life of the loan. If you’re 18, you won’t need a co-signer or a credit check to take out a federal loan. The two federal loan types for students are direct subsidized loans and direct unsubsidized loans.

Direct subsidized loans are for undergraduates. “Subsidized” means as long as you’re enrolled half-time in college, the U.S. Department of Education pays the loan’s interest, which, for the 2018–19 academic year, was 5.045 percent. They will also pay the accumulating interest for the first six months after you’ve graduated and during a deferment. These loans have aggregate and annual loan limits. You will need to speak with a loan officer at your college or visit to find out what these limits are for your situation.

Direct unsubsidized loans are for undergrads, graduate students, and those pursuing a professional degree. You do not need to demonstrate financial need to qualify for these loans. You will, however, be required to pay the interest on the loan while in school (the best option, if you can manage it) as well as during grace periods, deferment, and forbearance, or roll it into the principal loan amount (the least-preferred option as the interest compounds—it’s tacked on to your principal and then you’re charged interest on that larger amount). For undergrads, the interest rate is the same as a subsidized loan. For graduate students, the rate was 6.595 percent in 2018–19. The same loan limit restrictions apply.

If you receive multiple federal loans, by the time you graduate you could have a different interest rate on each loan, even though those rates won’t change. If you consolidate your federal loans after graduation, your interest rate will be the average of your loan rates. It, too, will remained fixed during repayment.

Federal loans have several repayment options for borrowers after graduation. The standard and often default repayment plan requires equal payments spread over a set number of months. A graduated plan increases payments every two years. Revised Pay As You Earn (REPAYE) calculates payments based on 10 percent of your discretionary income. Similarly, Income-based (IBR) and Income-contingent Repayment (ICR) plans are based on income, with the option to change the percentage and extend the repayment period.

Private loans

Private loans are another option to help pay for college costs. They come from traditional financial institutions—like banks and credit unions—or online lenders. Most students turn to private loans if they have:

Already borrowed the maximum amount for both subsidized and unsubsidized federal student loans

Good credit or a co-signer who does

Some private student loans offer fixed interest rates, but variable rates are more common. A variable interest rate increases and decreases based on market conditions throughout the life of the loan.

Choosing a loan with a variable rate is a gamble as interest rates may rise while you are still repaying the loan. However, rates could also fall, or, more likely, will rise and fall several times before the loan is completely paid off. Because they have the potential to rise, variable rates usually start out lower than fixed rates on student loans, somewhere between 1.25 percent and 1.75 percent lower.

Choosing a variable rate loan makes the most sense when rates are low and you are able to choose a short repayment period (five years or less). This leaves less time for rates to rise; however, shorter term loans mean higher monthly payments because you’re paying off more of the loan’s principle with each payment.

When shopping for private student loans, look beyond simple qualification and interest rates. Also look at the loan terms (the time to pay back the loan using minimum payments), repayment assistance programs, penalties for paying off the loan early, discounts for good repayment habits or high GPA, deferment options, and origination fees.

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