Student Loans (Part 1)
Paying for school can be a big undertaking. Understanding the difference between federal and private loans and your consolidation and repayment options can save you thousands of dollars.
Some companies promise to help reduce student loan debt, but there's nothing they can do for you that you can't do yourself for free—and some of the companies that promise student loan debt relief are scams. It's illegal for companies to charge you before they help you.
Financing Your Education
There are several types of aid available to help you pay for your education beyond high school, including grants and scholarships, federal work-study jobs and student loans. The first step is to complete the Free Application for Federal Student Aid (FAFSA) form at Link opens in a new windowhttps://studentaid.gov/h/apply-for-aid/fafsa.
Grants and Scholarships
Grants and scholarships are free money. They should be your first choice to finance your education. Why? Because you don't have to pay them back. A good way to apply for a grant is through your FAFSA form. You also can check out these other sources to find grant and scholarship opportunities:
- The financial aid office at a college or career school
- A high school or TRIO counsellor: Link opens in a new windowhttps://www2.ed.gov/about/offices/list/ope/trio/index.html
- The U.S. Department of Labor's free scholarship search tool: Link opens in a new windowhttps://www.careeronestop.org/toolkit/training/find-scholarships.aspx
- Federal agencies: Link opens in a new windowhttps://studentaid.gov/understand-aid/types
- Your state: Link opens in a new windowhttps://www2.ed.gov/about/contacts/state/index.html
- Your library
- Foundations, religious or community organizations, local businesses, or civic groups
- Organizations related to your field of interest, like professional associations
- Ethnicity-based organizations
- Your employer or your parents' employers
Federal Work-Study Jobs
Federal work-study jobs are another way to help pay for college. Work-study is a need-based grant that requires you to work part-time while you're in school. To qualify for work-study, you'll need to fill out the FASFA form and meet the needs-based criteria of the program. You are only paid for the hours that you work.
Student Loans
Student loans fall into two categories federal loans and private loans:
- Federal loans include
- Direct Loans, where the U.S. Department of Education is the lender
- Federal Family Education Loans (FFEL), where private lenders make loans backed by the federal government
- Federal Perkins Loans, low-interest federal student loans for undergraduate and graduate students with exceptional financial need
- PLUS loans, federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school
- Private loans, sometimes called alternative loans, are offered by private lenders, like banks and credit unions, and do not include the benefits and protections that come with federal loans.
Snapshot: Federal Loans vs. Private Loans
| Federal Loans | Private Loans | |
|---|---|---|
| Applying for the loan | You won't need a cosigner to get a federal student loan in most cases (except for PLUS loans). | You may need a cosigner and a credit check. The cost to repay a private student loan will depend on your credit score and other factors. |
| Interest rates (the cost of borrowing money) | Rates are fixed, and often lower than private loans. | Private student loans can have variable interest rates. |
| Repayment terms | You will not have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time. | Many private student loans require payment while you are still in school. |
| Undergraduate students with financial need usually qualify for a subsidized loan. The government pays the interest while you are in school on at least a half-time basis. | Private student loans are not subsidized. No one pays the interest on your loan but you. | |
| Loans can be consolidated into a Direct Consolidation Loan for free. Learn about your consolidation options here: Link opens in a new windowhttps://studentaid.gov/app/launchConsolidation.action. | There may be options for consolidation, depending on your lender. But there usually is a fee. | |
| There is no fee to repay your loan more quickly—called a prepayment penalty fee. | There may be prepayment penalty fees. | |
| If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments. | Private student loans may not offer forbearance or deferment options. | |
| There are several repayment options, including an option to tie your monthly payment to your income. | You should check with your lender to find out about your repayment options. | |
| You may be eligible to have some portion of your loans forgiven if you work in public service. | It is unlikely that a private lender will offer a loan forgiveness program. |
FAFSA
FAFSA stands for Free Application for Federal Student Aid. It is the only way to apply for federal student aid. It is free to apply. You must fill out your FAFSA form at fafsa.gov every year that you are in college, university or career school.
In addition, many states and colleges use your FAFSA data to determine your eligibility for state and school aid. Some private financial aid providers may use your FAFSA information to determine whether you qualify for their aid. Fill out your FAFSA form for free at Link opens in a new windowhttps://studentaid.gov/h/apply-for-aid/fafsa.
FSA ID
When you fill out your FASFA, you will also create an FSA ID. FSA ID stands for your Federal Student Aid Identification. It is a username and password that you create. You use your FSA ID to
- Get into the Federal Student Aid system
- Fill out your FAFSA form
- Legally sign your student aid documents
Only you can create and use your FSA ID. Don't share your FSA ID with anyone else. Dishonest people could use your FSA ID to get into your account and take control of your personal information.
U.S. Federal Trade Commission, Consumer Information. (2017, October). Student loans. Retrieved January 8, 2021, from https://www.consumer.ftc.gov