Simply put, college is expensive. According to data compiled by U.S. News & World Report, the average “sticker price” for college for the 2019-2020 school year is $10,116 for public in-state tuition and fees, $22,577 for public out-of-state, and $36,801 for private colleges and universities. While in-state students attending public students get a discount, $10,000 for a year of college is extremely steep for most American families. Add the other costs of college—from books to room and board—and it’s hardly surprising that most students and their families are reaching for financial assistance.
In 2014, the National Center for Education Statistics reported that 85 percent of college students were getting financial aid of some kind to pay for college—a percentage expected to increase as costs continue to rise.
Figuring out how to apply for student loans has become a major part of the college planning process. In this blog post, we will address some of the most frequently asked questions about student loans and give you tips on how to apply for private student loans and federal student loans.
How to Apply for Student Loans
The first thing to realize about student loans—well before you fill out a student loan application or sign on any dotted line—is that not all student loans are the same. The two broad categories of student loans are public and private. There are plenty of other factors to consider, too: some loans, for instance, are targeted toward students whose families have a proven financial need. It’s a complex system, and it can be overwhelming for college-bound students to navigate when they already have a lot of other concerns on their plate.
The second thing to understand is that “student loans” and “financial aid”—while often used interchangeably—are not synonymous terms. Financial aid is a broad category of post-secondary funding that not only includes student loans but also scholarships, grants, and work-study programs. For this post, we focus on student loans.
How to apply for federal student loans
Let’s start with federal student loans. One of the benefits of federal student loans is that the process for applying is relatively simple. Instead of applying for private loans with multiple banks or lenders, you only need to fill out one application to apply for federal student loans.
That student loan application is the FAFSA, which stands for “Federal Application for Student Aid.” As the name implies, the FAFSA isn’t just concerned with student loans but with “student aid” in general. That means filling out the FAFSA can also give you access to certain need-based types of aid that aren’t loans, including federal grants, work-study, and some scholarships. You can be considered for other types of aid by merely filling out the FAFSA.
The term “need-based” is a big part of the equation for the FAFSA. This form is intended to collect information on a student and his or her family so that the federal government can determine whether that student needs aid to pay for school. As such, the FAFSA primarily collects information about your family’s financial situation.
You will be asked to provide details about your family’s household income and assets. The government uses these details to estimate what they consider to be a fair “family contribution,” or the amount of money that you or your family can reasonably come up with to pay for college. As a result, students from wealthier households may not qualify for much federal aid. Students from less-well-off homes may be granted need-based aid to cover most or all their tuition. The FAFSA determines where you land on this spectrum.
There are three types of federal student loans:
Direct subsidized loans are need-based loans intended for undergraduate students. Those who qualify for these loans will not accrue interest on the money that they borrow until they are out of school.
Direct unsubsidized loans are not need-based. They are the most common type of federal student loan as they are available to all undergraduate or graduate students who wish to borrow to help pay for school. These loans do not require a credit check or cosigner. Unlike direct subsidized loans, they do accrue interest while you are in school.
PLUS loans are available to both graduate and professional students (Grad PLUS loans) and parents with dependents who are undergraduate students (Parent PLUS loans). These loans are credit-based, which means that qualifying for a loan is based on a credit check. Those with clean credit histories can often borrow as much money as they need to cover educational costs.
Regarding subsidized vs unsubsidized loans, the former is always a better choice thanks to the delayed accrual of interest rates. Since student loan debt is at a record high in the U.S., any slight relief could be a big factor for students and their families. Not accruing interest on a loan for four years because you are finishing college can be a crucial point of relief, but note that any federal student loan will not need to be repaid while the student is still in school. The repayment process always begins after the student graduates or otherwise leaves school.
Regardless of what the FAFSA says about your level of financial need, you are limited in the total amount of money that you can borrow in student loans from the government. For undergraduates, the maximum student federal loan amount is $12,500 annually and $57,500 in total. For graduates, the maximum is $20,500 each year and $138,500 in total.
The FAFSA opens on October 1, always a year ahead of the semester in which students expect to need aid. So, for students planning to start college in the 2020 fall semester, the FAFSA form became available on October 1, 2019. The FAFSA is always due by June 30 the year after a student seeks aid. Students must fill the form out each year while they are in college to continue getting aid.
How to apply for private student loans
While the process of applying for federal loans processes through a single student loan application, private student loans function similarly to other types of personal loan such as a mortgage or an auto loan. Students and their families must apply through specific lenders—usually a bank or credit union. At Resource One Credit Union, we offer personal loans to help families cover college costs.
As you would expect with any other loan, a private student loan requires a full underwriting process. If the student is named on the loan, his or her parents will often co-sign as qualifying for any private loan requires solid credit and a low debt-to-income ratio. Students won’t typically meet these requirements on their own with minimal income or credit. Parents can also take out loans on their own to pay for their student’s college expenses.
What to Consider Before Taking out a Loan
Before you dive into the world of college loans, there are a few factors that you will want to consider. With any debt, it’s important to think about your options from every angle, talk yourself through the pros and cons, and decide what the smartest option is for you.
Here are a few factors to have on your mind before signing on for a loan, whether federal or private.
Other financial aid options: Student loans are not the only type of financial aid available. You might qualify for federal grants, which could minimize the amount of money that you need to obtain through loans. Researching scholarship opportunities is also a must. While some colleges award a small number of need-based scholarships by using FAFSA information, most scholarships are merit-based. Some are given by colleges and universities to students who meet certain academic standards. Others are earmarked for athletics. Even organizations or benefactors in your community may offer annual scholarships that anyone can compete for just by filling out an application and writing an essay.
Savings plans: Parents, this one is for you: if you are saving money for your son or daughter’s college education and have come to this page, Resource One Credit Union can help. We offer youth savings accounts into which parents can deposit money for their children’s future education needs. You can also use money from an IRA account to pay for college expenses, usually without worrying about penalty fees for early withdrawals.
Interest rates: As you shop around for student loans, pay close attention to the interest rates. Rates for federal loans are set by the government while private loan interest rates will likely vary slightly from one lender to another. Look closely at rates and other repayment rules, as they may impact how manageable each loan will prove to be both short-term and long-term.
Ask lots of questions: Make a list of questions that you have about student loans and get answers before taking a single dollar in loans. For instance, you may wonder, “Does the government shutdown affect student loans?” In most cases, the answer is no since loans are disbursed through the Department of Education, which is a fully-funded federal program. Another common question is, “Can student loans be refinanced?” Private loans can always be refinanced. Federal loans can be refinanced but only through a bank or private lender and only be forfeiting some of the borrower protections that federal loans have (such as income-driven repayment plans or loan forgiveness programs). As you can see, exploring student loan options can and should trigger plenty of research.
Chat with Resource One Today
What do you need to get a loan? Whether you are thinking about taking out a private loan or exploring other options to pay for college—such as youth accounts—the team at Resource One Credit Union near Dallas is eager to help. Contact us today to start a conversation about the services that we offer to help students and their families plan for and pay for college.