Hi! This is a big question with a long answer! I’ll do the best I can to give some basic info here, but and you can also go to the FAFSA government website to read more. If you (or the student you are asking about) is in high school, your first stop should be the high school guidance office. If you are an adult looking to go back to school, a visit to the school’s financial office will be really helpful.
Before taking out a loan, you’ll want to make sure you’ve secured as much grant money as you can qualify for. If you’ve exhausted all possibilities for need- and merit-based grants and you don’t have enough savings or current income to cover college or tech school costs, you may need to borrow money to attend college or to pay for other training. Subsidized and unsubsidized student loans from the government or private loans may provide part of that funding. In general, schools expect parents (or the students themselves for returning adult students) to contribute a maximum of 5.64 percent of assets. Dependent students are expected to contribute up to 35 percent of their assets and 50 percent of their income.
These are the types of college loans students may qualify for:
· Federal Stafford (“Direct”) loan
· Perkins loan
· Federal PLUS loan
· Private college loan
· Home-equity loan
· Cash-value life insurance
· Some retirement accounts
The U.S. Department of Education offers Federal student loans:
· Stafford (or “Direct”) Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need. In this type of loan, the government pays the interest while the student is in school, during grace periods, and during any deferment periods; the borrower pays interest accrued after graduation. The fact that the government pays the interest for you during your four years of college is a really good deal; the interest is not “deferred” until you graduate but rather is paid for you. Once you graduate, you begin to repay the interest and the principal.
· Stafford (or “Direct”) Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan. Interest in unsubsidized loans is paid by the borrower, not the government.
· The Federal Perkins Loan Program is a school-based loan program for undergraduates and graduate students with exceptional financial need. Undergrad students can borrow up to $5,500 per year in Perkins Loans depending on financial need, the amount of other aid received, and the availability of funds at the college or career school.
· Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. Interest is charged during all periods. First-year undergraduates are eligible for loans up to $5,500. Amounts increase for subsequent years of study, with higher amounts for graduate students. The interest rates may vary based on when the loan is borrowed.
The interest rate on Federal student loans is almost always lower than that on private loans – and much lower than that on a credit card. You don’t need a credit check or a cosigner to get most Federal student loans. You don’t have to begin repaying your Federal student loans until after you leave college or drop below half-time attendance. Federal student loans offer flexible repayment plans and options to postpone your loan payments if you’re having trouble making payments. If you work in certain jobs, you may be eligible to have a portion of your Federal student loans forgiven if you meet certain conditions. Loan rates in 2016 range from 4.26% (fixed rate for a Direct Federal Stafford Loan) to 6.84% for a Parent PLUS loan. Private college loan rates may be higher.
In general, private loans are not subsidized or need-based. They also often require a cosigner – someone who promises to repay the money if the student fails to do so. The interest rates of private loans vary:
· Banks tend to have the highest interest rates.
· Some private organizations offer lower interest rates.
· Some colleges offer loans with relatively low interest rates.
Although the following loan choices tend to be less desirable than the other options discussed above, you can also consider a home-equity loan, retirement account, or a cash-value life insurance policy as vehicles for college tuition. Financial planners generally advise against using your home, your retirement account, or your insurance to pay for your child’s or your own college tuition, but these accounts are sources of money if you have no other choice. A benefit of these accounts is that the interest rate to borrow from them will likely be less than the rate for a private loan. In the case of a home-equity loan, where you borrow with your home as collateral, you take the risk of losing your home if for some reason you are unable to pay the loan back. If you borrow from your 401 (k) retirement account and can’t pay the money back in the period specified or if your job comes to an end and you are required to pay it back immediately, you could be in a jam. Your cash value life insurance policy may allow you to withdraw a certain amount of the paid premiums without paying taxes or a penalty or take out a loan from the insurance company using the cash value of the policy as collateral, but fees and other charges may reduce the value and usefulness of this method.
Thank you so much for writing!
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