College students are back to school: here’s how to strategically borrow student loans
Many young Americans go to college and while it is an exciting time for students and their families, it can be easy to lose sight of the big picture.
A college degree can be very expensive, leaving many graduates struggling with student loan debt. Outstanding Student Loans Reach $ 1.7 Trillion in Q1 2021, according to the Federal Reserve. And the cost of school fees alone has increased 33% since 2000, and that doesn’t even take into account the higher cost of housing, food and other necessities.
It’s important to make a plan for how to strategically borrow student loans, before you step foot in a classroom. After applying for the scholarship and completing the Free Application for Federal Student Aid (FAFSA), student loans can help cover the initial costs of a college education.
The main types of student loans are federal and private. Federal student loans are usually a good place to start paying for college education, but they may not cover the full cost of a college education. Private student loans can help close the funding gap, and they usually come with competitive interest rates.
Read on to learn how to use both types of loans to pay for your education. If you decide to borrow private student loans to cover tuition, be sure to get offers from several private lenders on Credible to compare repayment options.
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Borrow What You Can With Federal Student Loans
Federal student loans are backed by the Department of Education (ED), and they come with some federal protections such as forbearance from economic hardship and income-driven repayment plans that make them a good first choice if you have to borrow money to pay for your education.
Here are the main types of federal loans to consider:
- Direct subsidized loans. These are granted on the basis of financial need. ED pays interest while you are in school, for the first six months after leaving school, and during deferment periods. No credit check is required.
- Direct unsubsidized loans. Those are accessible to all university students, whatever their needs. You are responsible for paying interest during the term of the loan. No credit check is required.
- PLUS direct loans. Those are federal unsubsidized loans for graduate or professional students. There are also Parent PLUS loans, which can be taken out by parents of students. A credit check is required to determine its eligibility.
Federal student loans have fixed interest rates, which means they will stay the same throughout your loan. You will also need to factor in federal student loan fees, such as loan origination fees. For loans disbursed between July 1, 2021 and July 2022, the interest rates are as follows:
- Direct Subsidized and Direct Unsubsidized Loans: 3.73% for undergraduates.
- Direct unsubsidized loans: 5.28% for graduate and professional students.
- Direct PLUS Loans: 6.28% for parents, or professional and graduate students.
In contrast, the interest rates on private student loans can be fixed or variable. Variable interest rates can change over time, but they are often lower than what you might be entitled to with fixed rates. You can compare private student loan rates from real lenders in the table below and in Credible’s online loan market.
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How to cover the difference with private student loans
With both subsidized and unsubsidized direct federal student loans, your school’s financial aid office will determine how much money you can borrow based on the cost of tuition. Often this amount is not enough to cover the full cost of the university, such as accommodation, food and other costs related to education. This is where Direct PLUS loans and private student loans come in.
Since these are federal loans, Direct PLUS loans may come with more federal protections, such as a income-based repayment plan (ICR). However, this type of federal loan has its drawbacks. Direct PLUS loans are only available to parents of students and graduate or professional students, and they carry the highest interest rate of any federal student loan at 6.28%.
Private student loan rates can be fixed or variable rates, starting at around 1% APR for variable rate loans. Here are the average private student loan interest rates that credible borrowers received during the week of July 13, 2021:
- 10-year fixed rate private student loans: 5.55%
- 5-year variable rate private student loans: 3.05%
Unlike federal student loan rates, interest rates on private student loans can vary based on creditworthiness, loan size, and loan term. This means that you can research the lowest possible interest rate on a private student loan and even enlist the help of a co-signer to see if you can get a lower interest rate.
You can compare private student loan interest rates between multiple lenders at once without affecting your credit score in Credible’s online loan market. And once you have a good idea of the estimated interest rate on your student loan from a private lender, you can estimate your monthly loan payments using a student loan calculator.
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