How to Choose a Student Loan

As college costs continue to skyrocket most students find it nearly impossible to pay for their education without financial aid. Many have to rely on student loans as part of their bid to afford tuition and other expenses.

If you are considering taking out student loans, make sure you understand the different loan types and the costs before you borrow. The loan decisions you make today will likely affect your finances for many years to come.

This guide can help you sort through the maze of options, exploring loan costs, requirements and repayment plans so that you can choose your loan wisely. This will help you achieve your educational goals without undermining other life aspirations, such as starting a family, owning a home, and pursuing the career of your dreams.

*This rate is for the 2015-2016 college year until rates reset on July 1, 2016.

Interest rates on federal student loans are almost always lower than the rate on private loans.

Federal student loan rates change each academic year but most are fixed for the life of the loan. Generally, the loan rates are tied to a market benchmark, the 10-year Treasury note yield, plus a fixed margin. The rates are based on the last auction for the 10-year Treasury each May. These rates used to be set by Congress each year until the government changed the law in 2013. The change has made borrowing for school cheaper for many students.

Depending on the type of student loan you chose, the interest rate will begin to accrue immediately after the money is disbursed. That's generally the case with direct unsubsidized and PLUS loans. Subsidized loans don't accrue any interest until after you leave school and the grace period ends. This period is typically close to 6 months but may depend on the loan.

As you take out multiple loans while in school, it is likely that your loans will carry different interest rates. When you graduate may choose to consolidate your loans into one loan with a fixed rate.

Before you take out a loan, make sure you read your loan documents and understand your loan terms and understand the interest rate.

Applying for a federal student loan may not be the most fun way to spend an afternoon, but you can complete the paperwork carefully, completely and correctly by getting organized in advance and paying attention to details.

Here are the basic steps you must follow to obtain a student loan

In some cases, student loans may be discharged or forgiven if the student is moving into a particular type of career. While these special loans are very specific and not for everyone, you might be able to avoid thousands of dollars of debt if you apply at the right time for the right loans and agree to the right conditions. Here are some of the biggest categories of loans with career-specific terms.

While federal student loans are offered directly by the government, private loans may come from a variety of funders, including banks, credit unions, schools, or state agencies. Most financial aid professionals tend to offer federal loans as a first option, as their interest rates are typically lower and the terms are in sync with students' earnings capabilities.

Students are often drawn to private loans because, in theory, there's no cap on the lending amount. Some private loans may also offer a lower interest rate, though these rates are often unfixed and may fluctuate greatly during the repayment period.

But also know that many of these loans will require repayment to begin even while in school, meaning you might need a part-time job while still in school just to keep up with the loan payments. And once you are out of school, private lenders are less likely to be flexible or forgiving if you run into repayment problems.

Private lenders are not required to have a capped interest rate, meaning some can be as high as 18 percent. These interest rates are also not fixed; while it may have a low interest rate at sign-on, this number can fluctuate greatly throughout the repayment period. Subsidized federal loans are made possible by the government paying interest rates on the student's behalf while they are enrolled in school; private loans begin accruing interest immediately and compound over time.

Sarah attended a private, four-year liberal arts college where she was able to take advantage of federal student loans to cover most of her educational costs. However, Sarah also took out two separate private loans totaling $40,000 to cover room, board, and everyday expenses during her time in college. Because both of her private loans were unsubsidized, the loan amounts began accruing immediately, both with current interest rates of 10 percent. If Sarah plans to pay both of these off within 30 years, her average monthly loan payment during her first year of school would be about $351. Over the course of repayment, Sarah will pay about $126,370 to cover the principal and accrued interest just for the private loans.

By now, students should have a foundational understanding of federal versus private loans and the advantages and disadvantages of both. Even armed with this information, students may still find themselves overwhelmed by debt. One of the biggest problems comes from borrowing more than is actually needed, especially from private lenders. In 2018, some 10 percent of students ended up defaulting on their loans.

Loan consolidation occurs when multiple loans are combined into a new, single loan with the one interest rate.

Consolidating federal loans brings advantages and disadvantages:

Consolidating private loans also brings advantages and disadvantages:

Whether you graduate or drop out, land a great job or can't find any job, you have to repay your student loans. Recent economic conditions have made it hard for many former students to earn enough to repay their loans promptly, and a number of programs now offer ways to work with lenders while you get established financially.

• Forbearance
  This measure allows students to postpone loan payments temporarily while getting on their feet; it may also reduce payments for a set amount of time.

• Deferral
  If you can't pay your loans temporarily, deferment lets you put off payments for a defined span of time. In the case of subsidized federal loans, the interest also stops accruing during that time.

• Collections
  A loan moves into collections when a student has not paid on a loan nor made satisfactory alternate arrangements. Often, a debt collection agency takes responsibility for contacting you and for trying to work out a payment plan.

• Tax Refund Seizure
  Once a loan goes into collections, the government may opt to withhold or seize income tax returns or other federal payments to collect due money. They may also seize wages.

• Deferment or Forbearance Guidance
• Information on Collections
• Repaying Student Debt: Consumer Financial Protection Bureau

Student loans, whether federal or private, can be confusing and confusion can result in unwise decisions. Consider these tips for navigating this tricky process.

Thankfully, there is a bounty of resources available to help students understand the variety of loans available, compare their options, and pick the best one suited to their needs. Some of the most helpful resources include:

• Consumer Financial Protection Bureau
  The CFPB is an invaluable resource for students seeking guidance and protection while understanding how to repay their student loans. The site also provides up-to-date information about changes within student loans, including both federal and private.

• Federal Student Aid
  This one-stop website provides answers to any question students could possibly have about federal loans, including how to apply, requirements and qualifications, special forgiveness programs, and loan repayment services.

• Student Loans
  This website is often the first stop for students seeking federal aid. Here, individuals can complete the FAFSA, undertake entrance counseling, complete the Master Promissory Note, and learn more about how to repay their loans.

Accrual
Interest starts accruing, or adding up, according to a timetable specified in the loan documents and terms. Some loan plans start charging interest only after you have graduated or left school. Others start charging interest even while you are in school. When and how interest accrues is a key term of a loan.

Adjusted Gross Income
This information is used by federal lenders to determine if a student is eligible for an income-based repayment plan of an economic hardship deferment.

Borrower
The legal term for the person whose name the loan is held in.

Capitalization
Capitalization occurs when any accrued interest is added to the principal loan balance.

Consolidation
Used for both private and federal student loans, multiple loans can be consolidated into one monthly payment with a single interest rate.

Default
A loan goes into default when a student fails to repay a loan according to the set agreement for at least 270 days.

Deferment
Occurs when the student is given an authorized temporary period where they are not required to make payments. In the case of subsidized loans, the interest stops accruing.

Delinquency
A loan becomes delinquent when a student fails to make monthly loan payments by their due date.

Direct Debit
This is an option that allows lenders to automatically deduct monthly payments from the borrower's account. In some cases, lenders may give a small discount for those who use direct debit.

Disbursement
This is the act of providing the student or their school with the loan amount they are eligible for; it is also used as the starting date for interest accrual.

FAFSA
The Free Application for Federal Student Aid must be filled out for students to be considered for any form of federal aid.

FFELP
The Federal Family Education Loan Program offers a variety of subsidized and unsubsidized loans that are offered through private lenders but guaranteed against default by the federal government. These include Stafford loans, PLUS loans, and consolidation loans.

Fixed Interest Rate
This is a guaranteed interest rate for the life of the loan, which cannot fluctuate unless the loan is consolidated.

Forbearance
May take the form of either a temporary reduction of monthly payment or a dismissal of payments. Regardless of subsidy status, interest rates continue accruing.

Grace Period
In the case of Stafford loans, students are given a six month grace period after leaving before they must begin repaying loans.

Lender
The legal term for the organization responsible for disbursing funds.

Paperless Billing
Rather than receiving monthly paper bills in the mail, these online statements provide updates on your loan status.

Principal Balance
This figure includes both the original loan amount and any additional fees. It does not include accrued interest.

Promissory Note
Also known as a Master Promissory Note, this document is the legal and binding contract used for federal loans.

Subsidized Loans
The federal government pays the interest on subsidized loans while the student is enrolled at least half-time.

Unsubsidized Loans
Offered as both federal and private loans, the interest begins accruing at the moment of disbursement on unsubsidized loans.