Choosing between Federal and Private Loans

Federal loans should be a student’s first choice when considering their borrowing options for college. However, many times federal loans are just not enough to cover the costs of college, which is where private loans can come into play.

Private Student Loans — Loans given by banks and credit unions.

Federal Student Loans — Loans given the U.S. Department of Education.

Fixed-Rate Student Loans — The amount of interest charged on your loan doesn’t change.

Variable-Rate Student Loans — Interest rates depend on the market and can change over time.

Some students may NOT be eligible to receive federal loans because they:

• are not U.S. citizens
• are convicted of a drug offense
• are in default on a federal student loan
• don’t maintain satisfactory academic progress in college

Personalized Private Student Financing

Student loans generally cover essential costs of attending school, including tuition, fees, books, supplies, and room and board. Non-essential expenses like computer supplies, internet services, and parking fees may be covered by private loans instead.

Eligibility and Application Process:

Private loans often necessitate an established and decent credit score for eligibility. Since most high school graduates haven't yet established credit, a co-signer becomes necessary. A co-signer, with good credit standing, acts as a guarantor and assumes financial liability throughout the loan's duration. Typically, better credit scores, either yours or your co-signer's, lead to more favorable terms for private student loans.

The application process for private loans can vary across different lenders. Many provide the convenience of electronic applications on their respective websites. To complete the application, you will typically be required to provide your name, date of birth, school details, Social Security number, and income or tax information. Most private lenders conduct a credit check to assess your eligibility. Since private lenders don't disclose interest rates upfront, it is advisable to apply to multiple lenders to compare and identify the most favorable terms.

After approval, the lender will provide a letter outlining the loan's terms and conditions. The loan funds will only be disbursed once you accept these terms and sign a promissory note. This note is a legally binding agreement between you and the lender, confirming your commitment to repay the loan along with any accrued interest. Remember to retain a copy of your promissory note for future reference.

Loan Disbursement Information:

In most cases, loans are directly sent to the school to cover education-related costs. This ensures that your tuition and fees are paid first. If there are any remaining funds, they will be disbursed to you to cover additional educational expenses. With a private student loan, after tuition and school fees are taken care of, you can utilize the funds to pay for other necessities.

The loan amount you can borrow is typically determined by the total cost of attendance, which includes expenses beyond enrollment. When obtaining a private student loan, it's crucial to borrow only the necessary amount rather than the full offer, as it's easy to accumulate debt quickly and challenging to recover from it.

Exploring Federal Loan Options

• Fixed-rate, low-interest federal loans are common, and some may even be subsidized by the government, covering interest during enrollment or after graduation. To access federal loans, applicants must complete the FAFSA.
• Direct Loans are the predominant federal loan type, and undergraduate students can potentially receive subsidized Direct Loans based on financial need and academic performance. Both undergraduates and graduate students can also access unsubsidized Direct Loans without demonstrating financial need. The loan amount available through Direct Loans depends on the student's academic year and their cumulative borrowing of federal loan funds.
• Students with significant financial need may find Perkins Loans to be a beneficial option, offering subsidized and low-interest funds to cover their college expenses. However, it's important to note that Perkins Loans are scarce, constituting only about 2% of all federal aid distributed.
• Parent PLUS Loans provide a fixed interest rate option for parents of undergraduate students to borrow federal loan funds, with relatively high borrowing limits.
• Graduate or professional program students have the option to borrow GradPLUS Loans, which offer a fixed interest rate and high borrowing limits, after exhausting their Direct Loans.

Loan Coverage Areas

Student loans generally cover essential costs of attending school, including tuition, fees, books, supplies, and room and board. Non-essential expenses like computer supplies, internet services, and parking fees may be covered by private loans instead.