On the road to a post-secondary degree, college financing is extremely important to making everything work out. What do you need to consider as you take these important steps towards your future?
The first step is to fill out the FAFSA. The FAFSA determines your family's need and, subsequently, your eligibility for federal grants, such as Pell Grants and FSEOG, and loans, including Federal Perkins Loans and Stafford Loans. The FAFSA also helps serve as a bridge to determine eligibility for other financial aid, including institutional grants and need-based scholarships.
Once you have filled out the FAFSA and your eligibility for federal grants and student loans has been determined, your family may still need to borrow more than the government can offer you. It is therefore important to know about the different types of loans available and how they will work for you.
In addition to the federal Stafford and Perkins loans, there is also a fixed rate loan called the Federal PLUS Loan, that is taken out by the parent. The student is not obligated on this loan. The PLUS loan has a 7.9% fixed interest rate and a 4% fee. However, unlike the federal Stafford and Perkins loans, it doesn't have annual borrowing limits.
Other than the PLUS loan, college loans are primarily offered by the state and by private lenders. State-based lenders tend to offer fixed-interest loans, which means that the interest rate on your loan will remain stable throughout the term of your loan. Sometimes the rates on these loans are even lower than the federal PLUS loan rates and they may have no origination fees. Check out Rhode Island's fixed rate loan.
Private lenders and banks primarily provide variable-interest loans. This means that the interest rate you pay after college, along with your individual payments, could change from month to month. Although variable-interest loans are currently at all-time lows, the four years it will take to graduate from college—and the time it will take after that to pay off your loans—can be a long time in the financial world, and it is important to consider what your financial situation will be like after you graduate. While prime rate may be a 3.25% now, in the 80s, it was over 20%! Check out the history of the prime rate and determine if you are willing to take the financial risk over a 10-15 repayment period.
As you consider and select your college, your college may offer you a resource list that provides you with places you may apply to for a loan. Such lists can be invaluable for many students; remember, however, that you are by no means required to limit yourself to this list if you find better offers elsewhere.
Overall, the best thing you can do for your college financing is to be informed. Further descriptions of student loans can be found at http://www.cpcri.org/PayforCollege/FinancialAid101/TypesofAid/Loans/tabid/131/Default.aspx. You may also want to refer to RISLA's guide to student borrowing at http://blog.risla.com/borrowing-guide-for-student-loans.