If you filled out the Free Application for Federal Student Aid (FAFSA), odds are you will be receiving an award letter soon, from the colleges or training programs you listed on the FAFSA (either by mail, email, or both). Your award may include grants (free money), work-study (part-time job), and/or student loans. If one of your options is to take out a student loan, it’s important you know and understand a few things before doing so.
Federal or Private- Your loan will either be federal or private. Note – not all loans are alike, especially when it comes to private loans!
- Federal student loans and federal parent loans: These loans are funded by the federal government. They include the Direct Subsidized and Unsubsidized loans and the Direct PLUS loan.
- Private student loans: All nonfederal loans are referred to as “private” – but who makes the loans varies substantially! Lenders can include a state agency, bank, credit union, or a school. State and for-profit private loans often have credit requirements or may require a cosigner. Be sure to compare options, and start with state or other non-profit lenders.
Interest Rates- Be sure you understand how your interest rate is set – and if it can change in the future! Key terms to know:
- Fixed: This interest rate is set for the duration of the loan. It will not increase or decrease and your payments will remain the same.
- Variable: A variable interest rate will fluctuate as the market interest rates change. As a result, your payments will vary. This works well when interest rates are low. However, if interest rates rise then your payments, on the outstanding balance, will increase.
- Credit-Based: Credit-based interest is set according to your credit history. In most cases if you have a high FICO score you will be offered a lower interest rate than borrowers with a low FICO score.
Discounts or Borrower Benefits- Most private lenders will offer incentives to lower the overall cost of your student loan. These incentives are sometimes called Borrower Benefits. Shop around. They may include the following:
- No origination fee
- Auto-Pay discount
Can I Afford the Payments?/Calculators- It’s all too easy to accept student loans without thinking about the payments you will be making after graduation. Your monthly student loan payments should not be more than 10% of your expected annual salary. For help in calculating your payments visit http://www.finaid.org/.
Grace Period- This is the period of time you can wait before making your first student loan payment. Federal student loans come with a 6-month grace period, which begins once you graduate, leave school for any reason, or drop below half-time enrollment. State and other private lenders may offer a grace period, or not. Most family or parent loans (including the federal PLUS) do not offer a grace period. You should check with your lender on the grace period offered.
Forbearance and Deferment- Under certain circumstances, when you run into hard times, you might be able to receive a forbearance or deferment, which gives you temporary loan relief – although interest may still be accruing. You should check with your lender and know what options are available before taking out your student loan.
In short– do your research, shop around, and know your benefits. Most of all - never borrow more than what you absolutely need. For more information on keeping your student loan costs low visit https://acpe.alaska.gov/PLANNING/Money-marts/Keeping-Loan-Cost-Low.
If you need any assistance, please come by the ACPE Success Center located at the Dimond Center Mall. For more information or to schedule an appointment, please call us at 1 (800) 441-2962, option #4.