Student Loans 101: A Guide to Choosing The Best Loan
Advertiser Disclosure: Our first priority is to provide valuable information to help our readers gain insight into financial topics. Although we receive compensation from some of the brands listed on our site, we only highlight companies we believe can benefit our readers and their financial situations.
If you’re shopping around for a student loan, you have several big decisions to make. You’ll need to choose which type of lender to work with—whether the federal government, a private bank, credit union, or an online lender—and each one has a different application process, plus unique policies on loan repayment.
For most students, federal loans are the best option, since they offer low, fixed interest rates, flexible payment options, and many have no credit score requirement.
Applying for Student Loans
The steps to apply for a student loan depend on where you apply. Each lender has a different evaluation process, which may include a review of your credit scores, income and area of study. Lenders also have their own loan fees and repayment requirements, which you’ll want to review before applying.
How to Apply for a Federal Student Loan
You can follow these steps to apply for a federal loan through the U.S. Department of Education (ED):
- Submit a Free Application for Federal Student Aid (FAFSA) form by the set deadline.
- Receive your financial aid offer from your school.
- Complete the required online entrance counseling (takes about 30 minutes).
- Review and sign your Master Promissory Note.
How to Apply for a Private Student Loan
For private lenders, the application process should go something like this:
- Provide your personally identifiable information (PII) including contact info and SSN.
- Share your income and employment information.
- Provide details on your school and course of study.
- Request a loan amount.
- Review your loan offers and, if desired, choose one.
- Sign the required paperwork.
When do I Have to Repay my Student Loan?
For private student loans, your payments might come due while you’re still in school. Some private lenders offer a “grace period,” or extra time before payments are due, but your loan may accrue interest during this period.
For federal student loans, payments will be due to your loan servicer once you graduate, fall below half-time or leave school. However, the type of loan dictates whether or not you have an additional grace period:
- Direct Subsidized, Direct Unsubsidized and Federal Family Education Loans: Six-month grace period.
- Graduate and Professional Student PLUS Loans: Six month grace period.
- Perkins Loans: Nine-month grace period.
- PLUS Loans: As soon as the loan is fully disbursed (or paid out).
In terms of payment plans, you’ll be placed on a Standard Repayment Plan for your federal loan unless you work with your servicer to set up an income-driven alternative.
While the process of repaying an ED loan is quite different from paying a private lender, one commonality worth noting is that they both offer a 0.25% discount for borrowers who set up autopay on most loans.
Should You Take Out a Student Loan?
You should consider taking out a student loan if you haven’t found other means to cover the full cost of your education. In other words, before applying for a loan, consider the non-debt options like scholarships and financial aid.
If those alternatives aren’t enough to cover your school expenses, try applying for low-interest loans with flexible repayment terms, and/or improving your loan terms by applying with a cosigner.
If and when you apply, keep in mind you don’t have to accept the full loan amount you qualify for. The Consumer Financial Protection Bureau suggests the following: “A good guideline is to limit your borrowing to what your future earnings will allow you to repay.”
Which Type of Student Loan Should You Get?
All student loans are not created equal. Before applying for your school financing, keep these different loan types in mind to save money on your loans:
Subsidized vs Unsubsidized Loans
Students can access major savings on interest by choosing subsidized loans over unsubsidized. Here’s how they differ from one another:
- Subsidized Loans: These loans are for undergraduate students who need financial assistance. They don’t accrue interest while the student is in school at least half-time or during deferment.
- Unsubsidized Loans: These loans are for undergrad or graduate students and are not awarded based on financial need. Unsubsidized loans begin accruing interest right away and also accrue interest during deferment.
Public vs Private Loans
Students can choose between public loans (usually subsidized), available through the Department of Education, or they can take out private loans. For private loans, you can go to your bank, credit union, or any legitimate lender who offers student loans. Just beware that private loans are often harder to qualify for and harder to repay. Here’s a breakdown:
| Federal Student Loans | Private Student Loans | |
| Interest rates |
|
|
| Origination fee | 1.057% - 4.236% | Usually $0 |
| Credit requirement | None (except for PLUS loans) | Varies by lender and a cosigner may be required. |
| Income-based repayment plans | Multiple plans are available | May be available through some lenders |
| When are payments typically due? | When you graduate or leave school. | While you're in school. |
| Standard repayment | 10 years | 10 years |
Alternatives to Student Loans
Before applying for student loans, make sure to explore all of the alternatives to cover your schooling. One or more of the following could help you get an education without going into debt:
- Financial aid: Federal assistance for tuition, fees, housing, food, books, transportation and more.
- Grants: Financial aid that doesn’t typically have to be repaid.
- G.I. Bill: Help for servicemembers and veterans to cover tuition, fees, books and monthly living expenses.
- Scholarships: Nonprofit and private funds available based on academic performance, area of study, military affiliation (including ROTC) or other affiliations.
- Work-Study: Federal Work-Study Programs that pay qualifying students who work part-time.
If these alternatives aren’t enough to cover your school expenses, you may want to consider finding ways to reduce your tuition. For example, you might opt to complete your general education requirements at a community college before transferring to a university.
Sign Up To Gain Insight On Other Financial Topics
