Education is expensive, but thanks to student loans, it has not become the preserve of the rich alone. Both federal government and private players offer loans to enable the students to pass out of the educational institution in their chosen subjects.
What can a student loan use for?
Student loans, both federal student loans, and private student loans, are basically used to pay for a student’s education expenses that may include tuition, boarding, and lodging, fees for the educational institution, course books, supplies and equipment, computers and electronics that assist in education, transportation, and personal needs.
It is equally important to know what student loans should not be used for. They should not be used for entertainment, vacations and other things not directly concerning education.
Eligibility for student loans
The eligibility for federal student loans differs from private student loans. Let us see what these are:7
Federal student loans
The criteria for federal student loans that is offered by the government takes into consideration the student’s financial and family situation as per the norms of FAFSA (Free Application for Federal Student Aid). Federal student loan come under two categories subsidized loans and unsubsidized loans.
Private student loans
These loans are given by banks and financial institutions. The students can only realize them if their credit profile is sound. In this, the bank or the financial institution evaluates the student’s credit and that of his or her consigner’s.
Evidently, federal student loans attract lower interest rates as compared to private student loans. The former offer other benefits too. A student looking for the student loan, should always opt first for the federal student loan and go for private student loan only if there is a financial shortfall in completing education.
Applying for student loans
Whereas federal student loans have set criteria across the board, it is the private student loans that need a little research. While applying for a private student loan, look for the reputation of the company offering the loan. Other things to consider include, interest rate range, fixed or variable interest rate, any hidden charges, such as origination fee, repayment options, and the like.
How much student loan should you apply for?
Although there is always a temptation to borrow more, it is prudent to opt for only that much you can afford to pay back. Here are certain tips that will keep you on the right track regarding the student loan:
- The student loan should not be more than your expected first year’s salary. So, you must be clear what you want to major in, what jobs are available after graduation and what is their average salary range. The benchmark is that you should be able to pay back the loan within 10 years or less. This roughly works out to be below 15 percent of your monthly gross income.
- Look for free money, such as grants and scholarships. Unlike student loans, they don’t have to be paid back. There are some scholarship matching websites that will tell if you are eligible for them. However, don’t get too optimistic about this, since less than 0.3 percent of undergraduate students become eligible for it.
- Always keep federal student loan as your first option, since it offers many advantages over a private loan. For example, a federal loan has fixed interest rate that works out cheaper, whereas private one has variable rates that may jump up without warning. A federal loan also offers a deferment period when you don’t have to make payments if you are enrolled in a school or unemployed.
- If you want to reduce the quantum of your student loan, then avoid enrolling in expensive private or online schools. Opt for community colleges and state schools, since these are non-profit and cheaper, their fees being partially paid by the state. If such community colleges and state schools are not offering whatever you want to major in, go in for a vocation school to gain marketable skills. Choose the one that takes less time and again steer clear of private vocational schools.
- If you opt for a two-year course in a community college and then expect to switch over to a four-year institution, beware. This may turn out to be risky strategy, since only one-fifth manage to get a four-year degree and the balance two-thirds end up not graduating at all.
- Go in for a private loan only if you expect to earn handsomely and know how long it will take to search for such a job.
- If have taken the federal student loan and want to further take a private student loan, you may be taking on too much debt. You must exercise caution about borrowing too much. The private student loan may be dicey since they disclose the interest rate only after you have applied for it. Furthermore, private loans offering the lowest price may not give you the best rate.
- Savings to pay back the student loan, begin at home. So, cut corners wherever possible. Live in a low budget accommodation, buy second-hand textbooks, do without a car, cook your own meals, and the like. These are some of the ways you can save money. Also, you may work to earn and study at the same time. This will make you borrow less.
It must be clear that any student loan applied for will be given against a contract and the Master Promissory Note is a legally binding document.
A federal student loan borrower has the following rights:
- Right to temporarily stop payments with a deferment.
- Right to switch repayment plans for reducing payments depending upon the student’s financial condition.
- Right to loan cancellation.
For students aiming to pursue higher studies, student loans are a godsend. So, it is in their interest to familiarize themselves with the types of student loans to know what fits them the best. First timers need to be extra careful regarding whom to burrow from and should know their rights.