Financial Matters: College Loans
Paying for college is a significant challenge for many families. Once all types of grants, scholarships, work-study options, jobs, and family contributions are cumulatively considered, many families find they still must borrow money to cover remaining costs. Unlike grants and scholarships, loans must be repaid — with interest. The interest rate is a charge added to the borrowed money as a percentage of the total amount. A higher interest rate impacts the amount you’ll owe over the life of the loan. Just as there are many types of scholarships and grants, there are many types of student loans. Loans are offered by the federal government, state governments, colleges themselves, and private organizations. Most loans require families to submit a FAFSA.
Federal need-based and non-need-based loans
Based on information on the FAFSA, colleges may award a Perkins Loan to students with the greatest financial need. The FAFSA is also required for Direct Loans.
Direct Subsidized Loans are interest-free while the student is in college.
Direct Unsubsidized Loans charge interest but students have the option of postponing payment of that interest while in college; it will be added to the loan upon graduation. This invariably means you will owe much more, so, if possible, pay this interest while you are still in college.
Federal Direct PLUS Loans offer parents and graduate students the option of borrowing the total cost of college, minus any other financial aid that a student is offered.
State Loans
Each state has its own educational loan granting options. For specifics, go to the US Department of Education’s list of state higher-education agencies.
Private Loans
Typically, these are loans that are neither subsidized nor need-based. They may require that someone else (such as a parent) co-signs on the loan, and interest rates can vary significantly.
Banks usually have the highest interest rates and can be the least forgiving. They’ll likely run a credit check so work on your credit as early as possible. The higher your score, the lower your interest rate will be.
Some private organizations (such as SallieMae or Discover Student Loans) offer better rates, so explore all options. Most require some kind of academic performance standard, are specific to location, and may demand that the applicant has exhausted all other options.
Some colleges offer their own low-interest loans with reasonable interest rates.