How to Obtain a Student Loan
With the cost of higher education increasing, many students finance a part their education through student loans. Two primary types of student loans exist: private loans and federal loans. In order to obtain a student loan, several basic steps must be followed.
The Free Application for Student Aid (FAFSA) must be completed. The FAFSA website, www.fafsa.ed.gov, provides a simple, step-by-step application process. Students and parents of dependent students are evaluated for financial need. After need is determined, several types of student loans may be available.
Federal loans include Perkins loans, Stafford subsidized and unsubsidized loans, and Parent Plus loans. These loans establish fixed interest rates and maximum loan amounts for each academic year. Subsidized Stafford loans have interest paid by the government while the student is in school, whereas the interest accrues and is paid by the student in unsubsidized Stafford loans. The site www.studentaid.ed.gov provides a detailed narrative and tabular presentation of loan types and student loan rates.
Private student loans are made by a variety of lenders including banks, credit unions, and student loan companies. These loans are generally more costly than federal loans. Interest rates are based on either the LIBOR index or the prime interest rate and require a credit check to determine borrower eligibility. Additional interest may be added based on the credit-worthiness of the borrower. These lenders often charge fees, which can significantly increase the cost of a loan. Interest begins accruing as soon as the loan is dispersed. Interest is capitalized, or added into the unpaid balance of the loan, increasing the amount owed. The site www.FinAid.org/loans/ provides information about private loans and a link that compares the student loan rates of many private student loan companies.
After college, students may combine their debt into one loan, called a consolidation loan. There are advantages and disadvantages to school loan consolidation. Monthly payments may be reduced and there is only a single payment to one lender, but the payoff period is extended, which may increase the total amount paid. Some lenders provide payback options for consolidation loans, including extended repayment and income-sensitive repayment plans.
