How to choose a student loan to pay for college or graduate school
If you need funding for college, consider what scholarships, grants, and family supports are available first.
On its website, the US Department of Education recommends accepting “first free money (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans)”.
If scholarships, grants, and work-study don’t cover your college costs, you’ll likely start considering student loans to fill the gap. If you’re in need of college student loans, here’s a quick guide on how to choose one.
How to choose a student loan
1. Know how much you need
Before considering your student loan options, you want to know how much money you need to borrow. See what you have in grants, scholarships and family support. Next, take a look at tuition fees, projected costs for courses and books, accommodation, and any other fees you’ll need to cover. How much will you need in total?
Subtract any funding you have from this total. The rest is roughly what you will need to borrow on student loans.
2. Fill out the FAFSA
In order to obtain financial aid and student loan options, you must complete the form Free Application for Federal Student Aid (FAFSA®). The deadline for the FAFSA can vary from state to state, so be sure to check the deadline on StudentAid.gov. Your information will be sent to your school and you will receive a letter indicating whether loans are available to you, and for how much.
3. Look for federal loan options
When you complete the FAFSA, your award letter will outline the federal student loan options available to you. It is your choice whether or not to accept the loans and the amount. There are different types of federal loans you may be eligible for, including:
- Direct subsidized loans
- Direct unsubsidized loans
- Direct PLUS Loans
Subsidized loans are a good option for borrowers because the government pays the interest while the borrower is in school and by suspended periods. Unfortunately, this is not the case with unsubsidized loans. Direct PLUS loans are available to graduate students or parents.
Federal loans should be the first option you consider, as they come with generous benefits and protections. For example, federal student loan borrowers who work in the public sector are eligible for student loan forgiveness under the Public Service Loan forgiveness program.
Additionally, federal loan borrowers can keep their payments affordable on income-based repayment or defer their payments with deferral or forbearance. Federal student loans also have fixed interest rates and offer many repayment plans.
4. Look for private loan options
If your federal student loans don’t cover all of your costs, you can also consider private student loans. Private lenders will check your credit to see if you qualify and if you need a co-signer.
Private student loans are offered by financial institutions like SoFi (you can compare options online at sites like Loan tree and Credible) and don’t offer the same protections as federal student loans – no student loan forgiveness or income-tested repayments, and limited options if you are unable to pay your loans. Private student loans generally offer fixed or variable rates and may not have as many repayment plan options available. While private loans can help fill gaps in your college funding, it’s important to be aware of their limited protections.
5. Compare options and costs
When you have your financial award letter that outlines your federal student loan options, take a look at what is available to you and compare it to what you need. Does it cover all your costs? If you are in need of private student loans, you will want to compare the rates and protections between various private lenders.
Among your federal and private student loan options, look at:
- The repayment term
- The interest rate
- Your future monthly payment
- The reimbursement options available
Take a look at your interest rate and the total amount you borrowed. Use an online calculator to see how your interest rate will affect the total cost of the loan.
Additionally, review the available repayment terms. If you have federal student loans, you will automatically be enrolled in the standard repayment plan with a repayment term of 10 years. You can change your plan to something that works better for you, like an income-based repayment plan that caps your monthly payments at a small portion of your income and has a longer repayment term.
The interest rate and repayment terms available for private loans can vary depending on the lender, so check your options.
Going through all of these points can help you make an informed decision, so you can choose the student loan that’s right for you.
6. Apply for a student loan
When you’ve decided which student loans you want, it’s time to apply. For federal loans, this process is taken care of by the FAFSA, but you will need to accept the loans offered. If you are applying for a private student loan, have your income and tax information handy and prepare to apply with a co-signer. Fill out all the documents and apply online.
7. Sign a principal promissory note (MPN)
After you apply for your student loans, you will need to sign the Principal Promissory Note (MPN). The MPN is a legal document that states that you will repay your federal student loans. Your private student loans will likely have something similar in their terms and conditions.
9. Know when your first payment is due
Once you’ve applied for a student loan, you want to know when your first payment is due. As a rule, you are entitled to a deferral of tuition, so you will not have to pay anything during your studies. However, private loans may have different terms and require payment earlier. Check when your first payment is due and stay in touch with your loan manager or lender to stay on top of your loans.