Finding the best student loans can be an
intimidating task, especially if you’re attending undergraduate school for the
first time. Most kids don’t even know
what they’re going to major in, let alone how they’re going to stagger their
student loan payments. But student loans
aren’t as complicated as they may look.
Once you’ve got the facts, you’ll be paying off your student loans in no
time.
Federal Student
Loans
Student loans come in two categories: federal and private. You have to fill out a Free Application for Federal Student Aid (FAFSA) form if you want to apply for a federal loan. These loans come in three categories:
Direct
Subsidized Loans
These are for undergraduate students who
demonstrate financial need. With these
loans, the government pays your interest for you while you’re in school.
Direct
Unsubsidized Loans
These are available for both undergraduate
and graduate students. You don’t need to
demonstrate financial need to qualify, but interest will accrue while you’re in
school. You can, however, defer interest
payments until school is done.
Direct
PLUS Loans
These loans can be used for any educational
expenses outside of housing, tuition and books.
You must undergo a credit check, however, and undergraduates will need
their parents to sign on their behalf.
Benefits
Federal student loans are the better option 99% of the time for many reasons. The first is that you receive a fixed interest rate, which is usually lower than the interest rate for private loans. The second reason is that federal student loans typically have flexible repayment plans, allowing you to make payments according to your income level.
Federal student loans offer the options of deferment, where you pause payments while the government pays your interest. They also offer the option of forbearance, where you pause payments but interest continues to accrue. One final benefit of federal loans is the possibility of loan forgiveness for students who join the military, go into certain public service jobs or volunteer with select organizations.
Drawbacks
One of the biggest drawbacks of federal loans is the limit put on the amount you can borrow. Private student loans usually let you borrow as much as you need, but federal student loans impose a yearly limit. Federal student loans also include a small origination fee. The loan with the highest fee is the Direct PLUS loan.
Tips
To find the best federal loan deal possible, first apply for all of the free money, including any grants and scholarships that you’re eligible for. Then see if you demonstrate enough financial need to qualify for Direct subsidized loans, as these don’t require you to pay any interest.
Direct unsubsidized loans are the second best option, followed by Direct PLUS loans if you have any additional expenses. When you’re ready to pay off your federal student loans, start with the loan with the highest interest rate and going down from there to avoid highly compounding interest.
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