If your grants, scholarships, income and savings don’t cover all your college costs, consider taking out a loan. Borrowing money to pay for college can be a sensible choice, as long as you do it wisely. That means understanding all the terms of a loan — not just the interest rate — before you sign. It also means being careful to borrow only what you need. That way, your future self won’t be paying back a bigger loan (plus interest) than was absolutely necessary.
Here’s an overview of what you need to know about how the three main types of education loans work.
Your Best Option: Loans Offered as Part of Your Financial Aid Package
Your college’s financial aid package may offer you loans from the federal government, state agencies and the college itself. Usually, the federal government offers loans with the least expensive interest fees. But state agencies and colleges often provide inexpensive loans as well. To qualify for any of these loans, you need to apply for financial aid. Here are the steps to take:
- Meet all financial aid priority deadlines and special requirements at each college you want to attend. Meeting the deadlines to submit financial aid forms is important because some funds are limited and run out.
- After Oct. 1 of your senior year, complete the Free Application for Federal Student Aid (FAFSA) even if you don't expect to qualify for grants for students with financial need. You may qualify for need-based loans, such as the Federal Direct Subsidized Loan. (“Subsidized” means that the government pays the interest while you’re still in college, which will save you money.) Even if you don’t qualify for a subsidized loan, the application will qualify you for other loans.
- If your chosen colleges require the CSS PROFILE® or other financial aid forms, fill these out and submit them.
- Carefully review the award notifications you receive and contact the campus financial aid office if you have questions.
- Select a financial aid package that works for you and your family. If it includes a loan, remember that you are not obligated to borrow the full loan amount the package offers.
- Complete the paperwork to accept the financial aid package, including signing the associated promissory note (a contract that specifies the terms and conditions of the loan). Someone at your college’s financial aid office can help you understand the paperwork.
Your Next Choice: Federal Parent (PLUS) Loan
If you need further help covering college costs, your parents may be able to borrow money through the federal Direct PLUS Loan program. Parents can request PLUS Loans of any amount up to a student’s cost of college attendance minus any other aid received. Parents must show that they don’t have bad credit, but your family does not have to demonstrate financial need. Federal Direct PLUS Loans have a higher interest rate than federal Direct Loans. That means they’re usually more expensive than Direct Loans — but they’re usually less expensive than private loans, and they may have more favorable loan terms.
Your Last Resort: Private Loans
If college is still more than you can afford and borrowing more money is possible, consider a private loan. Banks, other financial institutions, and some private organizations and foundations may offer these loans. Private loans require a good credit rating and often call for a cosigner (someone who agrees to pay back the loan if you are unable to repay). These loans have different repayment options than federal loans and will most likely cost you more in interest. Also, they may not have the same kinds of protections in case of disability or death as do the federal loans.
Private loans generally should be taken out only as a last resort.
Here are some steps you should complete before taking out a private loan:
- Research the various loans that are available.
- Carefully compare the terms and conditions of each loan, from interest rates and borrower benefits to fees and repayment plans.
- Ask your financial aid office if there are other options you should consider first.
This article is intended for informational purposes and is not intended as tax or financial advice.