Figuring out how to pay for college can be a daunting task. As tuition prices rise, more and more students are relying on student loans to help them attend colleges and universities. Some of the best student loans to pay for college are federal loans because they have low interest rates and several benefits and programs borrowers can take advantage of during repayment.
Most federal subsidized student loans also don't accrue interest while you are attending school. If federal loans aren't enough to meet your needs or you don't qualify, you can always try private loans. We will discuss some of the pros and cons of federal and private loans along with some of the best loans to use in 2016.
Federal Student Loan Interest Rates
The interest rates on your loans is a crucial factor that needs to be examined carefully beforehand because it will affect how much you pay on your loans in the future. As with any loan, it's important to seek out the ones with lower interest rates.
Interest rates and loan amounts for federal student loans are reset each year. Typical interest rates usually fall anywhere between 4 percent and 6.8 percent. Last year, interest rates on direct loans decreased from 4.66 percent in 2014 to 4.29 percent in 2015.
If you are in graduate school, you can expect your loan rates to be slightly higher – in the 5 percent to just under 7 percent range. Interest rates for federal loans are always fixed, meaning you can lock in your rate when you take out a loan and won't have to worry about it fluctuating if interest rates change in the following years. Having a fixed rate makes it much easier to estimate your payments.
Federal Loan Options
You must file a Free Application for Federal Student Aid (FAFSA) in order to be considered for federal loan programs, like the Perkins Loan Program and Direct Loan Program. Once your application is processed, you will receive an Expected Family Contribution (EFC) that will determine your eligibility.
Direct Subsidized Loans
Only undergraduates who have a low EFC number and demonstrate financial need will be able to receive direct subsidized loans. For these types of loans, the government pays your interest while you are in school so it doesn't accrue. There is a small origination fee for this type of loan, along with a borrower limit. You can only borrow $3,500 to $5,500 per year and up to $23,000 total while you are attending college.
Direct Unsubsidized Loans
These loans are a bit different from subsidized loans because while undergraduate and graduate students can qualify, borrowers don't have to demonstrate financial need to receive a loan. While the interest rate is fixed for these loans, the government does not pay interest while you are in school, so interest will accrue over time if you don't pay on your loans while in school yourself.
However, you can borrow up to $5,500 to $7,500 per year or up to $31,000 total if you are an undergraduate student and $20,500 per year up to $138,500 if you are a graduate student. There is a small origination fee for this loan as well, which is around 1 percent. The origination fee is deducted before loan amounts are disbursed. For example, if you took out a $2,000 loan, you would receive a loan amount that is a few dollars less than that due to the origination fee, but when it's time to pay back your loans, your statement will specify that you owe the full price of the loan back plus interest.
Direct PLUS Loans
Direct PLUS Loans are a bit different. These loans allow the parents of undergraduate students or graduate students (PLUS loans are not available for parents of graduate students) to pay for additional educational costs if other federal loan options have been exhausted. The big benefit with this type of loan is that the funds can be used for a wider range of educational expenses. The limit for PLUS loans is the cost of attendance minus any aid already received. The interest rate is a bit higher, currently at 6.84 percent, but it is fixed.
A downside is that the origination fee is much higher and a credit check is performed, so it's possible to get denied for this loan if your credit is not good.
Perkins loans are subsidized and distributed by schools to students who demonstrate financial need. This loan has a fixed interest of 5 percent and doesn't change each year like other federal loans. No loan origination fees are charged and undergraduate students can borrow up to $5,500 per year and $27,500 total, while graduate students can borrow up to $8,000 per year or $60,000 total.
Pros and Cons of Federal Loans
Now that we've explained how each loan works and their similarities and differences, we'll run through some quick points regarding the benefits and disadvantages of federal student loans.
- Federal student loans have fixed interest rates
- There are options for both undergraduate and graduate students
- Students who demonstrate financial need can qualify for loans that will not accrue interest while in school
- Parents can take out loans for students to help with excess educational needs
- The interest rate is fixed and doesn't change with Perkins loans and there is no origination fee
- Most loans have limitations as to how much you can borrow
- Origination fees decrease the amount of loan funds you receive
- Credit history factors into Direct PLUS Loans
- Interest accrues while you are in school for some loans
Private Student Loans
Private student loans are available with banks, credit unions, and other private lenders. The interest rates with private loans are typically higher than with federal loans. In addition, some private lenders may offer low but variable interest rates on loans. Your credit score will determine whether you qualify for a private loan and what your interest rate will be.
Some of the most popular private lenders are Sallie Mae, Wells Fargo, and College Ave, just to name a few.
- The application process is easier and everyone is eligible to qualify
- You can borrow more than the limit for federal loans to meet your educational needs (the limit is usually cost of attendance minus any other aid received)
- Most loans have no origination fees
- Interest often starts accruing right after loan funds are disbursed
- Your credit score may hold you back from obtaining a loan or you will have to rely on a co-signer
- Interest rates tend to be higher and if you have a variable interest rate, you could be stuck paying more interest on your loans over time
- Most student loan relief options like loan forgiveness, deferment, and multiple payment plan options are not available
Shop Around and Find a Match for your Needs
Taking out student loans is a big decision that you should take time to explore before you finalize an option. First, assess your situation and see if you will qualify for any federal loans. Can you take out any scholarships beforehand and work to put extra money toward your education without student loans?
If you decide that you still need to take out student loans for college after taking a closer look at your financial situation, first learn how to get a student loan, then shop around to see which type of loan would work best for you. For example, take factors into consideration, like the current interest rate and whether it's fixed or variable, loan amount limits, the application process, and any other requirements you must meet.
Start by filling out a FAFSA online and comparing some of the best student loan options.