If you are looking to borrow for college, you may have heard about federal, private, and state-based student loans. But what is the difference between these loan types and which ones are the right ones for you and your family?
Federal Student Loans
There are several types of federal education loans that can help your family pay for college. Federal education loans fall into two categories: student loans and parent loans.
Federal Student Loans
When you borrow a federal loan, your lender is the US Department of Education. Students are advised to use up their Federal Subsidized and Unsubsidized Loans (also offen referred to as "Stafford" loans) before seeking a loan elsewhere. These loans carry a low fixed interest rate (currently, they are set at 4.66% for undergrads) and have an array of flexible repayment options to help new grads afford their monthly loan payments - or delay their payments, if necessary. To apply for one of these loans or for the Federal Perkins Loan, another low fixed rate federal student loan which is awarded through the school financial aid office, you must submit the Free Application for Federal Student Aid.
Federal Parent Loans
There is also a federal college loan option for parents, called the Federal PLUS Loan. These loans do offer some repayment flexibility and deferment options although not quite as much as the Stafford or Perkins loans, but they also carry a higher interest rate than the federal student loan options.
Currently, the Federal PLUS Loan rate is set at 7.21% with a 4.288% origination fee.
You can get more information on federal education loan programs at https://studentaid.ed.gov/types/loans.
State-based Student Loans
State-based student loans vary from lender to lender depending on the state in which you are borrowing. Not all states have a state-based student loan program, but these programs are typically available to students who are either a resident of the state or are going to a school in the state. These loans are often offered with low fixed interest rates and low or no fees. They are worth looking into if you think your student will need to borrow beyond the federal Stafford and Perkins loan limits.
Are you a resident of or going to school in one of the below Northeastern states? Check out the state-based student loan options.
Private Student Loans
Private student loans are another alternative to the federal PLUS loans. Private student loans usually offer credit-based pricing and variable rates which means you don't necessarily know what rate you will pay on your loan until you apply. Variable rate loans may seem enticing right now as markets rates hover at historical lows. But you must assess whether or not you will be able to afford a higher monthly payment if rates increase prior to paying off your loan. Most variable rate loans are based off of Prime or LIBOR. Clicking these links will show you how Prime and LIBOR have changed over time.
Fixed rate private loan programs are more rare and typically also have credit-based pricing. Unless you have some of the best credit out there, keep in mind you may not qualify for that lowest advertised rate.
Comparing Student Loans
College is an enormous financial commitment, and loans can no doubt add to your costs. Before borrowing, make sure you have completed the FAFSA and fully explored your eligibility for grants and scholarships. Also, pay what you can from your salary and savings before taking on any debt.
If you do decide you need to borrow, make sure you understand how much the loan will really cost you. What you repay is not only the amount you borrow, but also interest and fees. If you borrow a state-based or private student loan, you will receive a set of disclosures at the time of application that will give you information on all rates, fees and will display the total cost of the loan. Federal student loans are not subject to the same disclosure requirements but you can get an idea of your total costs by comparing rates and fees, as well as looking at your final loan disclosures. Also be sure to understand all of the loan benefits, from deferment to income-based repayment, to loan forgivenss before committing to any loan.