Borrow Student Loans

EVERYTHING YOU NEED TO KNOW ABOUT BORROWING MONEY FOR COLLEGE 

Donna Fuscaldo  |  August 3, 2020

Student loans are a fact of life for most college students these days. Here’s how to make sure you take out the right one. 

Note: This story is sponsored by College Ave Student Loans 

Navigating the student loan landscape can be daunting. There are several loan options available to college students both from the government and private lenders. But before you can even consider which loan is right for you, you’ll need to understand the true costs of college

“The way most folks approach it is the students pick out the schools to visit and then apply to them. It’s only after they’ve been accepted, they find out what they have to pay. You end up in a position where you have to borrow or bail,” says Jean Keller of Keller College Services, and creator of the Smart Plan For College. “The smarter way is to find out where you stand with the school financially and let that guide your choice.” 

CHOICES ABOUND WHEN SHOPPING FOR STUDENT LOANS

Armed with the full cost to attend a particular school and the available aid based on your situation, only then should you start shopping for student loans. The first stop should always be with The Federal Direct Student Loan Program (i.e., Uncle Sam.) Students can access a capped amount (see below) in lower-cost loans that don’t require a credit check or a cosigner.  Direct subsidized loans are need-based, while direct unsubsidized loans are available to everyone (the difference is that on a subsidized loan interest doesn’t accrue while you’re in school, on unsubsidized loans it does). 

Parent PLUS Loans are unsubsidized federal loans parents take out to pay for their child’s college education. They require a credit check and carry a higher interest rate than Direct Student loans offered by the government. “With the Parent PLUS loan, it’s a pass or fail credit test. Everyone gets the same interest rate,” says Kalman Chany, founder and president of Campus Consultants, noting these loans come with other protections. For instance, if the child dies, the loan is discharged. If the parent is having trouble paying it back there is forbearance, extended payment options, and loan forgiveness for public service workers, he says. 

But there is one big caveat with federal student loans: Often, the amount is not sufficient to cover even one year of tuition. Under current guidelines, a first-year freshman can borrow $5,500, a sophomore maxes out at $6,500, and third and fourth-year students can borrow a total of $7,500 each year. Meanwhile, the average annual tuition for a state school is $9,410. That doesn’t include room, board, books, travel, or other expenses.

NINE OUT OF TEN PRIVATE LOAN BORROWERS WILL NEED A CO-SIGNER 

Private student loans used to be the domain of the banks, but following the Great Recession in 2008, they exited the market. That ushered in a new crop of lenders eager to lend students money. Typically interest rates on private student loans tend to be higher than federal loans, which is why you should always go for federal loans first.  

The caveat with private loans is that nine out of ten times, the student borrower will need a co-signer, says Mark Kantrowitz, publisher and VP of research at SavingForCollege.com. When you think about it, this makes sense. Most high school students haven’t established a credit history that lenders can use to gauge their creditworthiness. That makes the student too risky on his or her own, thus the need for a co-signer. 

The interest rate you’ll pay on a private student loan depends on the credit score of the co-signer. The higher it is, the less the cost to borrow. The lower it is, the more expensive the loan. One way to find out what interest rates you can expect is to use a pre-qualification tool. For example, College Ave Student Loans’ pre-qualification tool tells a potential co-signer if his or her credit pre-qualifies for a loan, and what interest rates one can personally expect before applying and without impacting a person’s credit score. Often the repayment schedule is flexible — some lenders, such as College Ave, even let you make payments while you’re in school to lower the cost of the loan upon graduation.  

THERE ARE OTHER OPTIONS 

Tales of college graduates saddled with student loan debt they can’t afford to pay back are all too common these days. With the cost of a college education skyrocketing, many borrowers end up in over their heads. According to the Department of Education, of the federal student loan borrowers who began repaying their loans in 2016, one in ten have defaulted

To avoid becoming another statistic, you have to approach all student loans responsibly. That means not taking on more debt than you need and choosing a school you can afford to attend. It also means looking at your college education as an investment. Will attending a $100,000 a year university be worth it if you want to pursue a career as a teacher? (Probably not. You want to aim to keep your total borrowing to the salary you expect to earn your first year out of school, if not a little less.) A student loan calculator can help you estimate the total cost of your loan and what your monthly payments might be.   

Private student loans are an effective way to cover the cost of a college education, but not a be-all, end-all answer. Most of the time it is a combination of options, cobbled together, that helps you pay for your higher education. “Tax breaks may help you, or you may qualify for a scholarship or grant. You could start out at a community college before going to a four-year institution,” says Chany. ” It depends on your circumstances. Everyone wants a cookbook recipe, but it’s not one size fits all.”

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