Education

A Step-by-Step Guide to Student Loans

If you’re unemployed and thinking about going back to school, you are probably also wondering how to pay for it. The good news is that there are lots of options to help you pay for school at little or no cost to you. There are grants, scholarships, and loans geared toward people in just about any financial situation and with just about any financial goals.

Student loans are loans from the government, private banks, or specialized lenders to help a student pay the costs of education, including tuition, fees, and books. Student loans can also be useful in paying the costs of living while you are in school, such as rent, groceries, and gas.

Unlike grants and scholarships, student loans have to be repaid over time. Student loan interest rates are typically lower than car loans, mortgages, or other kinds of loans offered by banks. Unlike other types of loans, which borrowers start to repay immediately, student loans payments do not start until after you finish your education. Some loans even give you a six-month grace period to find work before payments begin.

Because you do have to repay them, student loans should be your last resort to pay for school. You should try to get as many grants and scholarships as you are eligible for before you start to explore borrowing money to pay for school. But if you have explored all of your options and still need to take out a student loan, there are some steps you need to take.

Step 1: Fill out the FAFSA

The Free Application for Federal Student Assistance (FAFSA) is the primary government application for education grants, scholarships and loans. If you have been awarded government grants or scholarships, then you have already completed your FAFSA, and it is required for any government loans you want to take out as well. Even if you are not eligible for or do not want government assistance, you should fill out the FAFSA anyway. Many banks and specialty lenders require your FAFSA form to determine how big a loan you are eligible for.

Step 2: Determine how much you need

If you have been accepted by a school, or know which school you plan to attend, you should find out how much it will cost to attend that school for the duration of your degree or training program. Most colleges have cost estimates on their websites, but you can also find estimates for most major American colleges at the College Board college search engine. Each listing includes cost estimates for a year of classes.

Don’t forget that college costs are more than mere tuition. There are additional fees for some classes, books for almost all classes, and external costs like room and board, personal expenses, and transportation. You should take all of these expenses into account when you estimate the size of the loan you need.

Step 3: Figure Out Where to Get It

There are three main providers of student loans: the federal government, private banks or credit unions, and specialty lenders. Each source has its own unique advantages.

  • The federal government loans funds directly to students through the Direct Loan program. The money comes from the US Department of Education, but is administered through your school. There are several kinds of loans offered by the Direct Loan program:
  • Subsidized loans are offered to students with greater financial need. Subsidized loans do not charge interest while a student is in school, for a grace period afterwards, and during deferment periods
  • Unsubsidized loans are offered to students without financial need. Unsubsidized loans charge interest while in school and during the grace period and deferment periods, though no payments are due during these times.
  • PLUS loans are unsubsidized loans for the parents of dependent students, and to students in graduate or professional programs. The amount of PLUS loans is determined by the other funding you receive. For example, if your total cost of attending school is $5,000, and you receive $3,000 in other funding, you are eligible for a PLUS loan of $2,000. PLUS loans charge interest at all times until they are repaid.

Consolidation loans are for students who want to consolidate their existing federal student debts into one lower interest payment. You cannot use student consolidation loans to consolidate private student loans or other debt.

The government limits the amount that you are able to borrow each year depending on your financial status. There are also limits on the amount of the loan that can be subsidized, which means that only part of your loan will be subsidized if you qualify. The borrowing limits are:

           

 

Dependent

Independent

First year undergraduate

$5,000 ($3,500 subsidized)

$9,500 ($3,500)

Second year undergraduate

$6,500 ($4,500)

$10,500 ($4,500)

Third and Fourth year undergraduate

$7,500 ($5,500)

$12,500 ($5,500)

Graduate/Professional

Grad/Professional Students are considered independent

$20,500 ($8,500)

The advantage of federal loans is that they have very low interest rates compared to student loans provided by private companies. The current interest for new Direct Loans is 3.4%. You can also calculate monthly payments and loan duration at the government’s website.

You can get student loans through your private bank or credit union. Just like a car loan or a mortgage, your loan eligibility and interest rate is based on your credit rating. This means that if you (or your co-signer) have good credit, you are eligible for larger loans and better interest rates.

Private loans can be a good choice if you have good credit, or have been banking with your bank or credit union for a long time and have good history of repayment with them. Current interest rates for student loans range between 3% and 10% depending on your creditworthiness

Unlike federal loans, which pay directly to the school, private loans are usually paid to the lender. This means that you can use the same loan to pay tuition and fees, buy books, and pay your living expenses without complicated transfers and eligibility requirements. Also, paying your private student loan down on time will improve your credit score for the future.

Specialty lenders like Sallie Mae (not to be confused with government mortgage guarantor Fannie Mae) are another option for private student loans. They function very much like your private bank or credit union, but focus solely on education loans.

In addition to traditional college student loans, Sallie Mae has loans designed specifically for students in career training and trade schools, medical and dental programs, and students studying for the bar exam.

Interest rates for Sallie Mae loans range from 2.25% to 9.37%, and repayment doesn’t begin until after you graduate. Timely repayment of Sallie Mae loans also helps improve your credit score.

Step 4: Apply

Once you know how much money you need to borrow and which lender gives you the best combination of lending amounts, interest rates, and repayment schedules, you need to apply for the loan.

As with applying for school, you should apply for the loan as early as possible to allow as much time as possible for the lender to process your application. The last thing you want is for classes to start with your loan still pending. Although you will be able to enroll, most schools will not allow you start attending classes until your tuition is paid.

The information you need to apply will vary depending on the lender, but you should have the following information available before you start the application:

  • Full Legal Name
  • Home Address
  • Telephone Number
  • Social Security Number
  • Email Address
  • School enrollment information (including your student ID number)
  • Most recent employment information (including employers names, phone numbers, and addresses)
  • Income information (including your unemployment assistance and any other income you may be receiving)
  • Credit information, including credit cards, mortgages, car loans, and any other debts you have incurred (the lender will run a credit check, but it helps to have this information handy)
  • Your completed FAFSA form, especially the Expected Family Contribution amount

Basically, the more information you have when applying for student loans, the faster and easier you’re application process will end up being.

Step 5: While You Are in School

No student loan lenders will require you to make payments while you are in school full-time. If a lender wants you to make payments while you are attending classes, they are probably not legitimate, and you should look for a new lender.

Some lenders will ask you to make small interest payments while you are in school, but you can usually defer those based on your need or ability to pay. Deferments like that usually won’t have a negative effect on your credit. Check with your lender about payment requirements while you are in school.

Step 6: After You Graduate

You will have to start repaying your loan after you graduate, or after your class load drops to part-time status. Some lenders will give you a short grace period after graduation to start repaying—typically about six months.

The amount of your monthly payments will depend on the size and interest rate of your loan. Ask your lender how big your payments will be when you sign the loan.

Your lender will do everything they can to make repaying your loan as affordable as possible for you. It is in your best financial and legal interest to make your loan payments in a timely and regular manner. If you are having trouble making a monthly payment, talk to your lender about extending your loan term or lowering your payments.

Step 7: Default, Forbearance & Forgiveness

If you fail to make your student loan payments in a timely and regular manner, you may end up defaulting on the loan. Defaulting on a loan is a serious action, and it will have severe negative consequences that could affect you for years.

While there are ways to defer your student loan based on financial hardship or long-term medical disability, the rules for these exemptions are very strict and difficult to qualify for.

If you miss payments for your federal loan, the government (or your lender) will attempt to collect payments from you by calling, writing, and emailing you. Some lenders will call you several times a day, which can become quite disruptive. If you miss payments for seven or nine months (depending on the terms of your loan) you will be considered in default. At that point, the government will turn your loan over to the guaranty agency for your state.

Once these agencies have your loan information, they have a number of tools to force you to pay.

  • Refund Penalties: The government can withhold your tax refund every year until your loan is repaid.
  • Wage Garnishment: When you do find another job, the government can work with your employer to forcibly withhold up to %15 of your paycheck to repay your loan.
  • Legal Action: The government and your lender can sue you in civil court, which will result in high legal fees and court costs if you lose. If you are ordered by the court to pay your debts and you refuse, you could eventually face jail time.
  • Credit Rating: Your failure to pay your loan will be reported to credit agencies, which will result in a lowered credit rating, which will make it more difficult for you to get loans in the future for cars, education, medical expenses, and buying a home.

Private Lenders like banks can also employ a collection agency to collect the money you owe. Collection agencies can be very aggressive in pursuing you, up to harassing you at home and at work to get you to pay. They can make it very difficult to live your daily life.

If you have a federal Direct Loan, there are programs and incentives that will forgive or defer a portion of your debt.

Volunteer Service: If you volunteer for 12 to 24 months of service in AmeriCorps, the Peace Corps, or Volunteers in Service to America (VISTA), you are eligible for up to $5,550 to pay your student loans.

Military: Army National Guard soldiers are eligible for the Student Loan Repayment Program, which offers up to $10,000 to pay off student loans.

Teaching: Students who teach full-time in low-income elementary or middle schools can have 15% of their federal Direct Loans for the first two years of teaching, 20% for the fourth year, and 30%for the fifth. Other loan forgiveness incentives for teachers can be found at the American Federation of Teachers website.

Law: Many law schools forgive loans for students who serve in public interest or non-profit firms.

Medicine: Medical and Nursing students who serve for a number of years in areas that lack adequate medical care are eligible for partial loan forgiveness.

Like any debt, taking on a student loan is a serious decision that will have consequences for years after you finish your education. Before you take on a loan, be sure that you will be able to follow through on school, and follow through on your financial commitment.


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Education