Let's be honest, education plays an important role in our future financial well-being. Statistics show that there's a strong positive correlation between people's education and wealth. Thus, workers currently without high school diplomas tend to earn an extra $6,700 per year if they complete their degrees. Households headed by someone at the age of 40 or over with a two- or four-year degree have a median annual income of nearly $76,300, while those with advanced degrees earn $116,265 annually. Additionally, an increase in numeracy skills usually results in an average increase in hourly wages of 17.8%.

However, your dreams of getting a higher education and maintaining a comfortable and lavish life may be shattered by sky-high tuition costs. However, don't rush to get upset. Even if you don't have enough savings to pay for your education, you can find some practical options to help you finance it. Let's take a closer look at them.

What Is a Student Loan?

A student loan is a form of borrowing that allows you to finance your education. Many people think that you can only use it to cover your tuition costs, but the fact is that its scope is much wider. You can use a student loan amount to cover any education-related expenses, including dorm or apartment rent, buying a laptop or textbooks, paying for summer school, and much more.

Types of Student Loans

Student loans can be commonly divided into two types: federal loans and private loans. As their names suggest, federal loans are backed by the government, while private loans are offered by private lenders and financial companies. However, it's not the only difference between these two options.

Federal loans are often cheaper. Also, some of them provide flexible repayment terms with a payment deferment until you graduate. Most federal loans don't take into account a borrower's credit score, making them accessible to those with no or poor credit. Additionally, there are federal student loans that provide assistance specifically for low-income individuals.

At the same time, private loans tend to be more expensive. They always come with hard credit checks through major credit bureaus, so individuals with no or bad credit may be either denied a loan or offered worse loan terms. Additionally, these options require you to start repayment right after you get a loan.

Federal Student Loan Overview

As we've already mentioned, federal student loans are options backed by the federal government. They can be divided into four common types:

  1. Direct subsidized loans. Direct subsidized loans are a form of debt that is aimed at helping undergraduate students whose families meet certain poverty guidelines. Direct subsidized loans come with several advantages. First, interest doesn't accrue during schooling times, the deferment period, and six months after graduating. Additionally, those who can demonstrate financial need don't make their loan payments while they are studying.
  2. Direct unsubsidized loans. Direct unsubsidized loans are available to undergraduate and graduate students regardless of their financial situation. This means that you don't need to meet any income caps to qualify. The interest rate accrues from the moment you get a loan. You can start repaying the funds after you graduate, but your interest will accumulate and be capitalized, making your loan more expensive.
  3. Direct PLUS loans. PLUS loans are available to graduate and professional students and parents of dependent undergraduate students. These loans require applicants to undergo a hard credit check. This means that your loan terms will depend on your credit score. Parents or students can request PLUS loan deferment, meaning that they may not repay them while at school. However, the interest applies immediately. Also, applicants are obliged to pay origination fees, which are deducted from their initial loan amounts.
  4. Direct consolidation loans. These options allow you to combine your existing federal student loans into one loan at lower interest rates and flexible terms. This way, your loans become more manageable by reducing your monthly payment amount. Consolidation loans come with multiple repayment plans, so you can choose the one that will better fit your budget. Additionally, some plans allow you to apply for loan forgiveness programs.

Private Student Loan Overview

Private loans are options that come from banks and private lending companies without any governmental backing. These loans require borrowers to make payments from the moment they receive a loan without any deferment. Thus, they can be more difficult to manage as you need to have sufficient income to cover your monthly payments. Therefore, students usually use private loans as an additional source of financing after they make the most of their federal student aid.

To qualify, you need to provide income confirmation and have an acceptable credit history. If you have bad or no credit, you may be asked to bring a co-signer with strong credit and payment histories and a high enough income. The amount you can get along with the interest rate depends mostly on these two factors.

How Much Can I Borrow with a Student Loan?

The exact amount depends on the type of loan you're going to get. When it comes to federal student aid, there are limits based on your academic degree, dependence, and school year.

Both dependent and independent first-year students who demonstrate financial need can get up to $3,500 with a subsidized loan. At the same time, first-year independent students can access up to $6,000 with an unsubsidized loan (with the total limited to $9,500), while dependent students can only get up to $5,000 (with a total of up to $5,500).

Second-year students can get no more than $4,500 with a subsidized loan regardless of their dependence. Unsubsidized options remain the same (the maximum of $6,000 and $2,000 for independent and dependent students, accordingly).

Third-year and above students can access up to $5,500 with a subsidized loan, while unsubsidized loan limits remain the same. Graduate and professional students have a $20,500 annual limit for unsubsidized loans only. The aggregate loan limit for subsidized and unsubsidized loans is as follows:

  • Dependent students: $23,000 with a subsidized loan plus $8,000 with an unsubsidized loan;
  • Independent students: $23,000 with a subsidized loan plus $34,500 with an unsubsidized loan;
  • Professional and graduate students: $138,500 in total.

When it comes to private student loans, the amount you can get will depend on your or your co-signer's income and credit score. There are typically no limits and caps, so you can take out up to 100% of your college attending costs.

Student Loan Interest Rates

Federal student loans come with fixed interest rates, meaning that they will not change within the loan's lifetime. Undergraduates can get federal student loans at the interest rate of 4.99% for the 2022-23 school year. Options for graduate students come with higher rates, which are 6.54% or 7.54% for unsubsidized loans or Direct PLUS loans, respectively.

Private student loan interest rates can be either fixed or variable. When you apply for a variable-rate loan, its initial percentage will be lower. However, it can go up under economic conditions. Generally, interest rates for private loans range between 2% and 14%, depending on the specific lender and your credit score.

Federal Loans vs. Private Loans: Which One to Choose?

To better understand the difference between these two options, let's take a look at their key characteristics:

Federal loans:

  • Fixed interest rates between 4.99% and 7.54%;
  • Loan deferment is available for subsidized, unsubsidized, and PLUS loans;
  • No interest rates applied during your schooling time and six months after graduation for some options;
  • Loan amounts are limited;
  • Flexible repayment terms of up to 10 years (up to 30 years for consolidation loans);
  • The ability to access loan forgiveness programs;
  • No credit checks for some options;
  • Subsidized loans require you to demonstrate the need.

Private loans:

  • Both variable and interest rates are available (can be up to 14%);
  • No deferment, you start repaying your loan right away;
  • Interest accrues immediately;
  • You can get up to 100% of your college attending costs based on your income;
  • Repayment terms of 7 to 15 years;
  • Loan forgiveness programs are not available;
  • Credit checks and income confirmation are required.

Summing up, it's recommended to apply for federal student aid first. Federal loans offer more favorable terms and come with some benefits, such as payment deferment and lower interest rates. However, they have some limits that may not be enough to cover all your education-related expenses. This way, you can turn to a private loan to get the remaining sum after you've maxed out other forms of aid available.

How to Get a Student Loan?

Each type of loan may require some specific steps. Additionally, the amount of financial support you need can also affect the process. Here's a checklist of some common steps you need to take to obtain a federal student loan:

  1. Complete a free FAFSA application. This will help you determine your eligibility. The application should be completed each year until you graduate.
  2. Consider grants and private scholarships. This can help you reduce your financial burden by accessing assistance that doesn't need to be repaid.
  3. Contact your school. You need to communicate with it in order to add any type of federal student aid to your account.
  4. Sign a master promissory loan for each loan. If you have any questions about your loan terms, you can also complete prep work and seek credit counseling.
  5. Apply for a private loan. If your federal loans are not enough to cover your education-related expenses, turn to banks and private lenders for additional financing. Choose a trusted and reputable lender and check the loan terms before accepting them.

When you apply for a private loan, your application procedure will be a bit different. Here's a basic step-by-step instruction:

  1. Check out your credit. If you already use any credit card or owe a loan, your credit score is already calculated. You can request a free annual credit report from each of the major bureaus to figure out whether you need a lender's requirements.
  2. Pre-qualify for a loan from several loan providers. This will help you compare options and choose the one with better terms.
  3. Apply through a trusted lender. You typically need to visit a lender's store with all the required documents and fill out an application form. A co-signer may be required for borrowers with no or bad credit and low income.
  4. Get a loan decision. It may take from several months to several weeks to get approved.
  5. Sign a loan agreement. If approved, read your loan contract terms and sign the documents if they are suitable.
  6. Receive the funds. The money is usually disbursed directly to your school, not your bank account.

Student Loan Considerations

Although student loans are considered an investment in your better financial future, there are some considerations about them. Here are the things to think about before applying for a student loan:

  • If you don't finish an academic program and leave the school, you may be asked to repay the loan immediately;
  • Federal loans are often not enough as they offer limited loan amounts.
  • Co-signing is a serious commitment. If you default to repay the money on time, your co-signer will be obliged to do this instead.
  • Late payments and defaults result in credit score damage.
  • Student loans can take a toll on your mental health and financial future, leaving you with a huge debt that you have to repay long after graduating from college.

Alternative Ways to Finance Your Education

Before deciding on a student loan, consider all the available alternatives. Some of those mentioned below may probably work better for you.

Savings

Having enough savings can help you obtain a degree without going into debt. However, many first-year students don't even have any working experience and don't have any income to save money for their education. Thus, many students can't finance their college attending costs without the help of their parents, who saved money for them.

Scholarships from Private Organizations

Scholarships are offered by various private companies, corporations, and even colleges. However, many of them set certain eligibility criteria based on a student's academic merits and skills. Some popular options include the Gate scholarship, the National Merit scholarship program, Dell scholarship, UNCF scholarship, and scholarship programs from major corporations, such as Microsoft, Google, Coca-Cola, Burger King, and more.

Grants

Grants are a type of assistance that a student can get without the need to repay it. Most grants are offered by the state or government, but there are also private and college-based options too. Some available variants include Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Iraq and Afghanistan Service Grants, Teacher Education Assistance for College and Higher Education (TEACH) Grants, and more.

Side Gigs

If you want to earn money while studying in a college, consider some side gigs and part-time jobs. This way, you will be able to get extra cash to pay for your education and finance your wants and entertainment. Consider freelancing to improve your skills in your future area of expertise, become a barista or an Uber delivery driver, or learn more about ways to earn money online.

Bottom Line

As higher education has a direct positive effect on our future financial well-being, more and more young people want to attend colleges. If you don't have enough savings to cover your education-related costs, student loans can come to the rescue. Whether you choose a federal loan or a private loan, you need to understand how they work and what pros and cons they have. We hope this article helps you better understand the essence of student loan options and make an informed decision.