Student Loans: How to Get Funding

If you don't have enough money to cover the cost of college, a student loan will let you borrow money and repay it with interest later. Although some student loans provide attractive repayment options, you must still pay back the principal and interest, just like any other loan you may take out. Nevertheless, a student loan interest rate is usually much lower than any other loan’s interest. The total amount you must pay over the course of any student loan depends on a number of factors, including interest rates, loan terms, and fees. Let's examine how student loans function.

Types of Student Loans

Student loans are provided to college students by two different categories of lenders. Federal student loans are provided by the American government. Private student loans are provided by financial institutions such as banks, credit unions, state loan programs, and others.

Federal Student Loans

The federal government of the United States issues federal student loans. Federal loans should always be taken out first because they are less expensive and frequently provide more benefits than loans from private lenders.

Benefits of federal student loans:

  • Such loans have lower and fixed rates;
  • You don't need a cosigner to get a federal loan;
  • Plans for repayment begin six months after you graduate from college or attend less than half-time;
  • Payback options include extended repayment and income-driven repayment.

Federal student loans, in turn, are divided into four types:

  • Direct Subsidized Loan. Undergraduate students who can prove they have a financial need may be eligible for subsidized loans, commonly known as direct subsidized loans. You won't be required to pay interest on the amount borrowed while enrolled in college at least half-time and for six months after you graduate or drop below half-time enrollment. This may result in significant financial savings.
  • Direct Unsubsidized Loan. Graduate and undergraduate students can apply for unsubsidized loans, regardless of their financial situation. In opposition to subsidized loans, you must pay the interest that has accumulated while you are still in school, or the interest will be capitalized (added to the loan balance).
  • Federal Direct PLUS Loan. Graduate students and parents of dependent undergraduate students may apply for Grad PLUS and Parent PLUS loans. Since there is no subsidy for PLUS loans, interest will start to accumulate as soon as the loan has been fully issued. While the student is enrolled in college and for six months following graduation, repayment may be postponed.
  • Federal Direct Consolidation Loan. You can combine several federal student loans into one loan through consolidation without sacrificing the advantages of the federal loans. Consolidation can be used to switch loan servicers or to simplify repayment.

Private Loans

Private lenders, typically banks, credit unions, state lending agencies, or non-bank financial institutions, provide private student loans. Private loans may have fixed or variable interest rates and frequently require a cosigner in order to be approved. Since the interest on private student loans is not subsidized, as soon as you borrow money, interest will start to be charged.

How Much Can You Borrow With a Student Loan

Only borrow what you actually need because you will be required to pay back the money you borrow with your student loans for education. Depending on the sort of loan, you may be able to borrow a certain amount. Your college will decide how much you can borrow in federal loans, but there are certain restrictions:

  • Undergraduate Federal Direct Loans. Depending on your year of study, the annual borrowing limitations range from $5,500 to $7,500 for undergraduate dependent students and $9,500 to $12,500 for independent students. Additionally, there are aggregate caps between $31,000 and $57,500.
  • Graduate Federal Direct Loans. Graduate and professional students may borrow up to $20,500 a year, with a total cap of $138,500, while medical school students may borrow up to $40,500 annually.
  • Private Loans. You may be able to borrow a certain amount from a private lender. The majority of lenders only permit you to borrow up to the cost of attending college, less any additional financial aid.

How to Apply for Student Loans

Federal student loans and private student loans have various application procedures. A private student loan should only be sought after all federal student loan options have been exhausted.

Applying for Federal Student Loans

You must submit the Free Application for Federal Student Aid in order to be considered for a federal student loan (FAFSA). How much you can borrow will depend on the information on the FAFSA. You'll get a financial aid offer from your college, along with instructions on how to accept your loan, in the mail. Then, you must put your signature on a Master Promissory Note (MPN).

Applying for Private Student Loans

You don't need to submit a FAFSA to apply for a private loan. However, you must submit a loan application to a chosen private lender. The lender will run a credit check on you and frequently want a cosigner with good credit.