Unless your parents earn massive salaries or have hefty savings, almost every student needs to borrow money to pay for their college. Many students take up a part-time job and pay for their education while they simultaneously attend college. This is because the popularity of student loans has increased.
Step 1 – Fill in the Free Application for Federal Student Aid (FAFSA)
So, the first step in your application procedure is filling the FAFSA. In the FAFSA, you’ll be asked a series of questions related to the income and investments of the students and the parents. Furthermore, there will be questions on other important things, such as whether the family will have any other child (apart from you) studying in the college at the same time? Following the information provided by you, your EFC (Expected Family Contribution) will be calculated by FAFSA. This calculated amount is what the government believes that you’d be able to pay towards your college for the upcoming year using your finances.
The FAFSA can be filled online. So, to save some time, you can accumulate all the information related to your account before you start working towards it. The FAFSA should be completed not just at the time while applying for the aid but after every passing year to ensure that you keep getting the requisite aid.
Step 2 – Compare different offers
Now, the college financial aid department who you reach out to will utilize all the information provided by the FAFSA to calculate the amount of aid that they will let out for you. This amount is reached by reducing the EFC from the COA (Cost of Attendance). The COA includes aspects, such as mandatory fees, tuition fees, board, and room, along with several other expenses. You can check this on the website of almost every college.
If there’s any difference between the COA and the EFC, the college will offer an aid package that will comprise the paid work-study, Federal Pell Grants, and loans. Unlike the loans, the grants do not have to be repaid, except in certain rare circumstances. These grants are given to the students by the government to cater to their financial needs.
Once you get your acceptance letter from the college, they’ll simultaneously notify you of the aid that they are offering. It is called an award letter. Further, besides the federal aid, the colleges might also give money from their funds, such as athletic or merit-based scholarships.
Usually, the award letters are different for every college. Thus, you must compare them simultaneously. As for the loans, you should compare the amount of money offered by the school and note if it is unsubsidized or subsidized.
- Unsubsidized loans
These are direct loans, which are given out to the families irrespective of their needs. On these loans, the interest starts accruing just when the loans are given.
- Subsidized loans
These are direct loans, which are mostly like grants and are given to students who are in extreme financial need. The key advantage of this loan is that the interest on the loans will be covered by the United States Department of Education till the time you are a half-time student and for the initial six months post your graduation.
For students who qualify, the college will grant both unsubsidized as well as subsidized loans. There are a bunch of advantages of federal loans over student loans from private lenders and banks. The fixed interest rate is comparatively lower, and federal loans have flexible plans for repayment. However, the amount of money that you can borrow is limited. For instance, first-year undergraduates can borrow a maximum amount of USD 5,500. Of this amount, the subsidized loans cannot be greater than USD 3,500. Moreover, there is a limit on the amount that you can borrow in totality throughout your college career.
In any case, if you need more money than that, you can opt for the Direct Plus Federal Loans. These loans are meant for graduate students, professionals, and parents of undergraduate students. Usually, the limit of these loans is fairly higher. You can avail of them irrespective of your need, and the amount can be the cost of attendance net of any aid that the student is already availing. However, the parent borrowers must pass a check for providing the assurance of the creditworthiness before applying for the loan.
Step 3 – Try for private student loans
In case you need more money compared to how much you can avail of via the federal student loans, you can apply for a loan to a private bank, financial institution, or a credit union. Such types of loans can be taken irrespective of your need. To avail of these loans, you’ll have to use the forms of the lending agency and not those of the FAFSA. Only those with a good credit rating or those who can get a co-signer with strong credit history (relative or sibling) should go with this alternative.
Usually, the interest rates charged on private loans are much higher than the federal loan. Moreover, the rate is variable and not fixed. This leaves you with a bit of uncertainty on the amount that you’ll finally owe to the bank. Besides, the private loans do not have any flexible repayment plans available and cannot be consolidated as per the direct consolidation program. However, after you graduate, you can refinance this loan at a possibly low rate of interest.
Step 4 – Pick your school
Of course, the choice of college will not depend on the amount that you’ll need to borrow for one college over the other. However, this is still very important. Let’s understand this with an example.
Think of a situation wherein you graduate from a college but have a massive debt in your name. At times, there’s the debt, and the students don’t even graduate. This will not only bring on unnecessary stress in your life but will also derail your life and career choices for many-many years to follow. So, when you avail of a loan, take into consideration the career that you are going to get involved in the future when you have to bear the loan. Thus, it is always good to opt for a career which will fetch you a high starting salary. This will ensure that you are in a better position to take care of your debt.
Worst student loan mistakes that you must always avoid
See, neither of us likes the idea of getting a student loan. However, at times, it is inevitable. For some students, it is the sole option for them to finance their college years. It can certainly be your way to a rewarding career and a fulfilling job. Having said that, there are some smart and dim-witted ways of getting a student loan. So, here we have come up with some common student loan mistakes that you need to strictly avoid.
Lying in your application
The first big mistake that you might make in your student loan procedure is falsifying your application. There’s a very high probability of you being busted because schools take the time and the patience to audit all the submitted applications. So, if you are caught, you’ll not only end up losing out on the student loan but might also have to bear a fine towards it. Moreover, you might be booked for fraud and sent to prison. So, be honest while filling the application form.
Not prioritizing between the wants and needs
Take a moment to understand the distinction between wants and needs. Let’s suppose you take a loan that you use to fund your education. It is good debt because your education is something that will always stay with you. However, if you use the same amount of loan to pay for a video game, a play station, a huge television, or to buy the latest mobile phone, it is called splurging and is certainly a bad debt. These things go obsolete in less than a decade, and buying them from the loan money is not called for.
Yes, we are all humans, and splurging once in a while is a part of our nature but that’s for when you earn that money. You cannot mortgage your future for transient pleasures. This is a disaster in terms of money management. So, understand the distinction between your needs and wants and make clear life choices.
Thus, when you have to use the loan, think of your tuition fee over expensive dinners in fancy restaurants. Also, in case you get yourself a higher amount of loan than what you possibly need for survival, you should act responsibly and save this excess money. You can invest this amount in a savings account that can fetch you the highest rate of interest. This investment will certainly be helpful when you have to repay your loans after graduation.
Not choosing the right plan for repayment
You may find it tempting to opt for a repayment plan that requires only the minimum monthly payout. However, what you fail to analyze is that if your repayment plan has a minimum payout every month, then it means that the plan will also have the highest term of repayment. So, consequently, the cost of the loan (interest) is also more. Thus, you should always opt for a pay as you earn or an income-based plan. Yes, it might be tempting to choose for 25 years over 10 years to repay your debt, but that certainly means that the overall cost that you bear is higher. Thus, when you have to choose a repayment plan, pick one with the maximum payout that you can afford monthly. So, how do you ascertain the amount? According to experts, the payout towards your student loan shouldn’t be over 10% of your salary. However, as and when the salary increases or there’s an improvement in your financial situation, you can revise this repayment plan.
Not considering refinancing
If you note a decline in the interest rates, you should consider refinancing your loans. What could be a competitive interest rate a few years might be increased now. For those who have taken multiple loans, consolidating them could be a preferred option. It will reduce your overall interest payments. Of course, there will be differences in the loan terms and the cost of loans offered by different lending groups. So, take your time and compare the numbers diligently to ensure that you are getting yourself the best possible deal. Now, if you have a student loan, and you consider refinancing it, it means that you are exchanging your loan and getting a private loan. It directly implies that you are forgoing the loan forgiveness options as well as the income-based options. However, those plans may not be feasible. Those who cannot refinance the entire loan can consider making an additional payment every month, and that would work towards shortening the term of the loan.
Missing out on your monthly payments
Many students miss their monthly payments, hoping they’d pay double the amount next month. However, that’s a strict no. Whenever you miss a payment or pay later than the due date, there is a black mark on the credit report. It will hamper your credit score and will stay in your credit history for many years. This might impact your eligibility when you apply for a loan in the future. Thus, you must be careful.
