How to choose a student loan to get the money you need for college or grad school
- Student loans come in two types: federal and private.
- To choose a student loan, you'll first want to figure out how much you need to borrow, and then which options are available to you at what rates.
- Compare your options and terms before choosing a loan, then choose the one with the most favorable terms and find out when you first payment is due.
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If you're in need of funding for college, first look at any scholarships, grants, and family support available.
On its website, the US Department of Education recommends accepting "free money first (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans)."If scholarships, grants, and work study don't cover your college costs, you'll probably start looking at student loans to bridge the gap. If you need student loans for college, here's a quick guide on how to choose one.
How to choose a student loan
1. Know how much you need
Before looking at your student loan options, you want to know how much money you need to borrow. Look at what you have in grants, scholarships, and family support. Then look at the tuition costs, projected class and book costs, housing, and any other costs you'll be expected to cover. How much will you need total?
Subtract any funding you have from that total. The remainder is approximately what you will need to borrow in student loans.
2. Fill out the FAFSA
In order to get financial aid and student loan options, you must fill out the Free Application for Federal Student Aid (FAFSA®). The deadline for the FAFSA may vary by state, so be sure to check the deadline at StudentAid.gov. Your information will be sent to your school and you will receive a letter outlining if any loans are available to you, and for how much.
3. Research federal loan options
When you fill out the FAFSA, your award letter will outline which federal student loan options are available to you. It's your choice whether to accept the loans and the amount. There are various types of federal loans you may qualify for, including:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS loans
Subsidized loans are a good option for borrowers, as the government pays for interest while the borrower is in school and through periods of deferment. Unfortunately, that's not the case with unsubsidized loans. Direct PLUS loans are offered to graduate students or parents.Federal loans should be the first option you consider, as they come with generous benefits and protections. For example, federal student loan borrowers who go on to work in the public sector are eligible for student loan forgiveness under the Public Service Loan Forgiveness program.
Additionally, federal loan borrowers can keep their payments affordable on Income-Driven Repayment or postpone their payments with deferment or forbearance. Federal student loans also have fixed interest rates and offer numerous repayment plans.
4. Research private loan options
If your federal student loans don't cover all of your costs, you may consider private student loans as well. Private lenders will check your credit to see if you qualify and whether you'll need a co-signer.
Private student loans are offered by financial institutions like SoFi (you can compare options online through sites like LendingTree and Credible) and don't come with the same protections as federal student loans - no student loan forgiveness or income-driven repayment, and limited options if you're unable to pay your loans. Private student loans typically offer fixed or variable rates and may not have as many repayment plan options available. While private loans can help cover any gaps in your college funding, it's important to be aware of their limited protections.
5. Compare options and costs
When you have your financial award letter that outlines your federal student loan options, look at what is offered to you and compare it to what you need. Does it cover all of your costs? If you need private student loans, you'll want to compare rates and protections among various private lenders.
Among your federal and private student loan options, look at:
- The repayment term
- The interest rate
- Your prospective monthly payment
- The repayment options available
Take a look at your interest rate and the total amount you borrowed. Use an online calculator to see how your interest rate will affect the total cost of the loan.
Additionally, review the repayment terms available. If you have federal student loans, you'll be automatically enrolled in the Standard Repayment Plan with a 10-year repayment term. You can change plans to something that works better for you, like an Income-Driven Repayment plan which caps your monthly payments to a small portion of your income and has a longer repayment term.The interest rate and repayment terms available for private loans may vary by lender, so check to see what options you have.
Reviewing all of these points can help you make an informed decision, so you can choose the right student loan for you.
6. Apply for student loans
When you've decided which student loans you want, it's time to officially apply. For federal loans, that process is taken care of with the FAFSA, but you'll need to accept the loans on offer. If you're applying for private student loans, have your income and tax information ready and be prepared to apply with a co-signer. Fill out all of the paperwork and apply online.
7. Sign a Master Promissory Note (MPN)
After you apply for your student loans, you'll need to sign the Master Promissory Note (MPN). The MPN is a legal document that states you will pay back your federal student loans. Your private student loans will likely have something similar in their terms and conditions.
9. Know when your first payment is due
Once you've applied for student loans, you want to know when your first payment is due. Typically, you're eligible for in-school deferment so you won't have to pay anything while in school. However, private loans may have different terms and require payment sooner. Check to see when your first payment is due and stay in touch with your loan servicer or lender to stay on top of your loans.
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