Although nobody likes to take out a loan, many people justify getting a student loan because it amounts to an investment in the future. Because student loans have lower interest rates, on average, than other loan types, you also have less risk. Especially if you plan in advance how you will repay the loan once you finish school, you should feel comfortable with taking out a student loan.
Many students take advantage of a student loan called a Stafford loan, a loan governed by federal regulations. The amount of money you can get in a Stafford depends on several factors, including your income (your family’s income if you are a dependent), the number of family members, and the number of college students in your family. In order to qualify for a Stafford, you must have U.S. citizenship or a permanent residence and you must attend school as a full- or part-time graduate or undergraduate student.
Your school determines how much money you can get based on these factors, as well as which type of Stafford loan you want. Staffords come in two types: subsidized and unsubsidized. With subsidized loans, the government pays the interest that accumulates on the loan while you’re in school. For unsubsidized loans, you have to pay the interest while you’re in school, or else defer the interest payments until after you graduate. While anyone can qualify for an unsubsidized loan, you have to show financial need to get a subsidized loan where the government pays the interest.
If you have an unsubsidized loan and don’t want to pay interest while in school, you can choose to defer the interest payments by capitalizing the interest. When you capitalize the interest on a student loan, you add the interest payments to the loan balance, increasing the size and cost of the loan for the future. If you qualify for a subsidized loan but still need more money, you can take out both loans to get the maximum amount available between the two. How much money you qualify for with the unsubsidized loan plan also depends on whether you’re a dependent or independent as well as your year in school.
Stafford loans also come in two variations, depending on who supplies the money. In the first kind, administered by the Federal Family Education Loan Program (FFELP), funds come from private lenders. Private lenders could include banks, credit unions, and savings and loan associations.
If your school is a direct lending school, you will get the second loan variation, administered by the Federal Direct Student Loan Program (FDSLP). In this case, your loan comes directly from the government.
Interest rates vary on student loans, but generally run lower than other loan types. A typical interest rate might range from 2 to 4 percent, and interest rates on Staffords can’t exceed 8.25 percent.
To apply for a Stafford loan, you can just fill out an online FAFSA application (Free Application for Federal Student Aid). Your school will then determine the amount for which you will qualify. With student loans, you don’t have to let tuition costs limit your opportunities.
By Lisa Zyga