Students preparing to go to college this fall might be preoccupied with choosing a computer or shopping for sheets that fit a dormitory bed.
Often less attention goes into selecting college student loans. The decision gets shunted aside or made in an instant because tuition is due, loans have confusing names and the financial aid office at your college might provide little guidance. Many students assume all student loans are similar — a mistake that can inflict thousands of dollars in unnecessary debt.
Consumer advocates — worried about students coming out of college with overwhelming debt — have been pushing colleges to provide more help to students trying to make loan choices. Some colleges, such as Barnard College and Mount Holyoke College, have been praised by the Institute for College Access & Success for emphasizing the risks of private loans.
But even if your financial aid office isn’t particularly helpful, you can identify the best loans yourself.
Start with a telephone call to your college financial aid office director, and take the initiative by asking whether you might still qualify for any grants or scholarships that you have not yet requested. If you come from a modest-income family, ask about Pell Grants, which can provide up to $5,500 in money that does not have to be repaid. Then ask if you can tap any state grants in your home state or the state where you are attending school. Try calling your state government’s department of education.
If you find you are too late to qualify for a grant this year, put next year’s application date on your calendar. Never pass up free money.
After tapping as much free money as possible, your next step is to choose student loans. You want to turn first to loans from the federal government rather than private loans that come from a bank or nongovernment lender. Again, you should be directed to federal loan applications by your college financial aid office. You can get additional information at students.gov.
The paperwork from your financial aid office will probably give you a choice between subsidized Stafford loans or unsubsidized Stafford loans. There is a huge difference between them. If you qualify, take the subsidized Stafford loans, which carry a $19,000 limit for four years of undergraduate studies. Subsidized means the government reduces your costs by absorbing interest during in-school deferment and provides a very low interest rate, of 3.4 percent. That rate is for loans originated during the 2011-12 academic year.
That’s a lot better than the 6.8 percent on the regular Stafford loan, which is unsubsidized. Also, because interest on an unsubsidized loan accumulates while you are in school, your balance on, for example, a $19,000 loan would be about 16 percent higher compared with a subsidized loan, said Mark Kantrowitz, publisher of FinAid. Keep in mind that for 2012-13, the subsidized-loan rate increases to 6.8 percent, matching the rate for an unsubsidized loan.
Typically, if your family’s income is no higher than $50,000, you will be in a good position to qualify for a subsidized loan. More than $100,000 makes it unlikely but not impossible. Factors like having retired parents or multiple siblings in college at the same time will affect eligibility. Cost of the college also can make a difference, Kantrowitz said.
If you can’t get a subsidized loan, choose the regular Stafford loan. Also, ask your college financial aid office if you can get a Perkins loan. These are federal loans with a 5 percent interest rate, and they go to students who have lower incomes than most students at a particular college. So if you come from a middle-income family, but attend a college that attracts affluent students, you might qualify for a Perkins loan at that college, even though you wouldn’t at a community college with many low-income students.
If you are like many students, you might find that the federal loans you are offered are not adequate to cover all your costs. In that case, your parents can borrow additional money using what are called PLUS loans. The interest rate is set at 7.9 percent.
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