The high cost of college tuition has made it almost impossible for students to fund their higher education using their personal finances alone. After scholarships, grants, and work study programs have been exhausted, students turn to taking out loans to pay for college.
When you start looking for student loans, you will find numerous options. There are different types of federal loans as well as private loans, each with its own eligibility criteria, terms of interest and other limitations. Trying to make sense of it all can be overwhelming.
How do you calculate how much your education is going to cost?
Should you apply for more than you need, ‘just in case’ or should you apply only for the exact amount that you need?
How do you receive the money?
1st Step – Calculate How Much Your Education Is Going To Cost
Tuition fees vary hugely from one college to another, making it impossible to make a blanket statement regarding the cost of college. In calculating how much your higher education is going to cost you, you will have to do separate calculations for each of the colleges you wish to attend.
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Remember, the total cost of education is more than just the tuition fees. You must also take into consideration the cost of room, board, text books, college supplies, transportation and personal expenses.
Subtract this from the finances you have available, including any financial aid packages that you have received from that school. The balance is the amount that you will have to borrow.
When you have found a reasonable compromise between your choice of school and how much it is going to cost you, it is time to start looking for loans.
2nd Step – Explore Available Loans
Most student loans fall into two categories—federal loans, which are backed by the federal government, and private loans, which are offered by private lenders. You should first exhaust all your federal loan options before even considering private loans. This is because federal loans are cheaper and they also have several other features that are beneficial to borrowers.
Federal loans – Federal loan are intended to fund the education of low-income students and their families. Interest rates of federal loans are generally lower than that of private loans. Many of these loans do not have any financial eligibility requirements and the interest rates are not pegged to you or your family’s credit history. When it is time for you to accept the financial package, you can decide whether or not you want to accept the entire package or only a part of the package depending on what other sources of income you have access to.
Private Loans – Only consider private loans if your needs exceed the federal loan package you receive. Do extensive research on private lenders as each lender has their own terms and interest rates. Ideally, you want to borrow only from those lenders who offer the lowest interest rates and relatively flexible terms. Your parents’ bank may be a good place to start.
3rd Step –Apply For Student Loans
Applying for federal loans – You will come across the term FAFSA often while searching for financial aid. FAFSA stands for Free Application for Federal Student Aid. You can apply for all federal financial aid by completing and submitting the FAFSA. You will need to submit the FAFSA every year that you’d like to be considered for financial aid. The deadline for the FAFSA application is end of June for that academic year, but you shouldn’t wait till then as some federal loans have limited funds and these tend to get exhausted quickly. The best time to submit your FAFSA is in early spring.
Applying for private loans – The loan application timeline as well as the process is quite different for private loans. These will vary from one lender to another as well as the type of loan you are applying for. You will have to find out details about each lender’s deadlines, eligibility criteria and application formalities and proceed accordingly.
How You Get Your Loan Money
Both, federal loans as well as private loans are paid directly to the college you are enrolled in. If there is any left over, the school will make it available to you in the form of a refund.
Before the funds are transferred you will need to sign a promissory note, promising to pay back the money you owe by the date that you and the lender have agreed on.
Most Important Caveat About Taking Out A Student Loan
Unfortunately, because some loans are relatively easy to obtain, many students are tempted to over-extend and seek admission in more expensive colleges in order to take advantage of easy loan opportunities. This can be a huge mistake. The higher the loan amount you take, the more the debt you are going to be in after you graduate.
To avoid this temptation, choose your colleges first and only then apply for a loan taking into consideration the cost to attend those colleges. If you are approved for a higher loan amount, only accept what you need and return the rest. If the approved loan is far lower than your needs, look at colleges with lower tuition fees or considering saving on rent and board. Whatever you do, do not get into more debt than is necessary.
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