Most college students use loans to help pay for their college education. But understanding college loan types and figuring out which ones you qualify for and what will be best for you isn’t all that easy. There are federal loans, private loans and consolidation loans. Some have grace periods, some defer payments until graduation and others are for graduate students only. With all the college loans out there, how do you know which one is for you?
Understand College Loans
There are three main types of college loans: federal loans, private loans and consolidation loans. Each one has its own benefits and drawbacks, and while you may qualify for some, you may not qualify for others. Let’s take a look at each loan type and what they have to offer.
Federal Student Loans
Federal loans tend to be the best option for undergraduates and graduates alike. The interest rates are low and fixed, and they usually offer the best payment options. It’s best to try to get federal student loans before looking into private loans to fund your college education.
You can get federal student loans by filling out a FAFSA application or by using a lender that offers federal loans, like SallieMae. Federal student loans usually do not require perfect or even great credit, but they do have other qualifications for applicants. You cannot receive a federal student loan for college if you’ve had certain drug offenses or do not have a GED, high school diploma or a passing score on an ability-to-benefit (ATB) test.
There are four types of federal student loans:
In order to get a Stafford or Perkins loan, you must fill out a FAFSA application. PLUS loans for parents and graduate and professional students have their own application that you can get from your school’s financial aid office or through a lending institution.
Private College Loans
Because private college loans have high interest rates and don’t have the grace periods or deferred payments like federal student loans, you'd be better off pursuing private loans as a secondary option.
Private college loans charge higher interest rates, but are better options than putting your college education on a credit card. The interest rates for these loans are not fixed, and can increase over the years. Private lending institutions also give out loans based on the applicant’s credit score rating. If your credit score rating is below 650, you will usually be denied the loan. By having a co-signer with good credit, it is possible to get the loan with a score lower than 650.
Make sure that you don’t borrow more than you need, as excess money can lower your need-based financial aid. So only borrow money to pay for tuition and fees, as anything else will be regarded as extra income and could negatively affect your other financial aid.
Student Loan Consolidation
Consolidation loans take the multiple college loans you took to pay for your education and lumps them into one large loan. This means you make one payment instead of several, and it can save you money as the consolidation loan interest rate is the weighted average of all of your interest rates.
You can consolidate all federal student loans and some private loans. You can even consolidate a single college loan. However, you cannot consolidate loans unless you are in the grace period or have started making payments.
College Payment Strategy
To get the most help paying for college, you need to follow a simple strategy. First, submit a FAFSA application and apply for as many scholarships as you qualify for. Once you have found out how much free money you can get, as well as how much you can get in federal student loans, then you should look into PLUS loans. If after all these options you need more money, you should look into private loans or consider working while going to school to cover the remainder.
Paying for college doesn’t have to be impossible. With college loans to help you make tuition payments, your education is within your reach.
