How to Choose a Student Loan

ByMoneyGeek Team

Updated: September 9, 2022

ByMoneyGeek Team

Updated: September 9, 2022

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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.

Federal Student Loan Types

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

Advantages of each loan type

Type of loan
Why this loan

PLUS

PLUS loans cover the difference between how much a school costs and how much other financial aid the student has received.

Direct Subsidized

Typically has a lower interest rate than other federal loans. Interest doesn't begin accruing until after the student has left school.

Direct Unsubsidized

Students aren't required to make any payments while still enrolled half-time

Federal Student Loan Interest Rates

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.

How to Apply for a Federal Student Loan

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

1
Gather your documents and fill out a FAFSA

To be considered for any federal student loan, students must fill out the Free Application for Federal Student Aid (FAFSA). Because some federal loans are given on a rolling, first-come, first-served basis, aim to have this completed at the start of the calendar year (or, if you're being really proactive, you can submit it as early as October). Dependent students will use their parent's financial information, while independent students will use their own earnings, tax records and financial records.

Collect these documents and confirm that they are accurate and up-to-date:

  • Social Security card (or number)
  • Driver's license (or number)
  • Alien registration number for non-US citizens
  • Investment and family asset documentation
  • Federal income tax records
  • Documentation of untaxed income
  • Federal student aid ID, or FSA ID, and Save Key (PINs are no longer valid)
2
Review the loan offer

After you have submitted the completed application, you will receive a financial award letter letting you know how much funding is available. Depending on any other private loans you may have applied for, you should review the loan paperwork; repayment terms and requirements; and think through the implications for your post-graduate life. Be sure you fully understand the agreement, especially when considering large loan amounts.

3
Accept or decline the offer

Once receiving and reviewing the offer and terms, contact your school's financial aid department to accept or decline the loan offers. First-time borrowers must complete the Entrance Loan Counseling session and sign the Complete Master Promissory Note. The counseling is intended to ensure that you understand what you are getting into with the loans and repayment.

4
Receive remaining funds

Once all paperwork has been satisfactorily completed, the school will disburse funding into the student's account and apply it towards tuition, fees, and housing if the student is living on-campus. If there are any remaining funds after this step, they will be available directly to the student.

Career-Specific Student Loans

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.

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TEACHERS

The federal Teacher Loan Forgiveness Program was developed to encourage more students to enter the teaching profession.

  • In addition to loan forgiveness, the Department of Education also offers TEACH Grants of up to $4,000 each academic year for students planning to become teachers.
  • Borrowers who teach full-time for five consecutive years at an approved elementary or secondary school, or educational service agency, could be eligible for up to $17,500 of loan forgiveness.
  • Eligible loans for forgiveness include direct subsidized and unsubsidized loans, including the Stafford Loan. The program also requires teachers to be employed in an area qualifying for Title 1 funding, with 30 percent or more of enrolled students qualifying for Title 1 services. (Title 1 channels resources to school districts with high proportions of low-income students.)
  • Most teachers might qualify to have $5,000 of their debt forgiven. Those who teach math, science or special education are considered "highly qualified" and can receive up to $17,500 in loan forgiveness.
  • The U.S. Department of Education offers a comprehensive guide on loan forgiveness for teachers.
  • The Ultimate Guide to Student Loan Forgiveness for Teachers // Teacher Loan Forgiveness Application

Source: The U.S. Department of Education

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MILITARY

The federal government offers a variety of loan forgiveness and repayment options for those enrolled in military service.

  • Members of the armed forces who have made 120 payments on their direct loans may be eligible for Public Service Loan Forgiveness, a program that eliminates the remaining balance.
  • In some cases, the Department of Defense may repay some of all of existing student loans; those who have a disability related to a period of active service may also qualify for having their loans discharged.
  • Federal Student Aid U.S. Armed Forces Handbook
  • Other helpful services include the possibility of interest rate caps, payment deferment, zero percent interest while serving in a hostile area, income-based payment plans, and the HEROES Act Waiver.

Source: The U.S. Department of Education

HEALTHCARE

Shortages of doctors, nurses and health technicians have prompted incentives for those entering key health fields.

  • Depending on their role within the healthcare industry, some students may be eligible for Public Service Loan Forgiveness, a program that eliminates the remaining balance after 120 payments.
  • Eligible roles are related to public health and may include nurses, nurse practitioners, nurses serving in a clinical facility, or full-time roles considered to be a healthcare practitioner or support occupation.
  • The U.S. Department of Health and Human Services offers the National Health Service Corps, a tax-free loan repayment program that allows licensed providers to earn a maximum of $50,000 towards repayment during a two-year commitment.
  • Association of American Medical Colleges Student Loan Repayment
  • Depending on the area of work the student undertakes, they may be able to use a combination of both healthcare and nursing loan forgiveness programs.

Source: The U.S. Department of Education

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SPECIAL EDUCATION

Teachers of special education are often eligible for numerous loan forgiveness and repayment options.

  • The Teacher Loan Forgiveness Program allows for teachers of special education to receive up to $17,500 towards loan forgiveness during a five-year, consecutive teaching position.
  • Loans eligible for forgiveness include direct subsidized and unsubsidized loans, including the Stafford.
  • If operating as a special education teacher, students meet "highly qualified" requirements to be eligible for the maximum amount of loan forgiveness.

Source: The U.S. Department of Education

NURSING

A shortage of qualified nurses led the federal government to create a number of programs that help students moving into nursing professions receive loan forgiveness.

  • The Department of Health and Human Services offers the Nurse Corps program, allowing registered nurses to pay off 60 percent of their loan balance with a two-year service commitment.
  • To be eligible for Nurse Corps, students must be a licensed registered nurse, and be employed full time in an eligible facility experiencing a critical shortage.
  • Further details about the NURSE Corps repayment program can be found in the Bureau of Health Workforce's Application and Program Guide.
  • Depending on the area of work the student undertakes, they may be able to use a combination of both healthcare and nursing loan forgiveness programs.

Source: The U.S. Department of Health and Human Services

Private Student Loans

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 Student Loan Interest Rates

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.

Private Loans: A Case Study

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.

Sarah's Loan Summary

Loan Detail
Description

Private loan amount

$40,000

Interest Rate

10 percent

Term

30 years

Average monthly payment 1st year

$351.03

Total payments over 30 years

$126,370

Tips if You Are Getting a Private Loan

1
Go Federal First

Before considering a private loan, make sure you've used all available federal funding first, as these loans will be less burdensome in the long run.

2
Know Your Credit

Because these loans come from banks, credit unions, or other private lenders, they often require a credit check. This number will likely dictate interest rates, and students holding a lower credit score will likely be required to pay higher rates.

3
Understand Interest

When possible, try to find a private loan offering a fixed interest rate, as those with variable rates can skyrocket over time.

4
Think Long Term

As evidenced in the case study above, interest rates make a substantial difference to the final loan repayment amount. Whether speaking with a financial advisor or using a loan calculator, make sure you understand exactly how much you're agreeing to pay back.

5
Get a Break for Your Good Behavior

Similar to car insurance, some lenders offer lower rates or special perks as students age, grow their credit score, and prove themselves as good borrowers. Ask your lender if they offer any similar programs.

6
Stay on it

The worst thing you can do is get behind on your payments. While you may need to negotiate a lower amount as you get on your feet, it's important to always be chipping away at the balance.

Student Loan Application Tips

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Your Life With Loans After Graduation

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.

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Loan Consolidation: Pros & Cons

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:

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Consolidating private loans also brings advantages and disadvantages:

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What Happens If You Can't Pay?

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.

Additional Resources

Student Loans Questions & Answers

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Rosemary Ferrucci is the Associate Dean for the Office of Financial Aid at New York Institute of Technology. Here's her take on how students can make the most of student loan programs and avoid missteps.

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Help Beyond Federal Student Loans

Dos and Don'ts

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

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Additional Resources & Help

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.

Student Loan Glossary

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.

About MoneyGeek Team


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The MoneyGeek editorial team has decades of combined experience in writing and publishing information about how people should manage money and credit. Our editors have worked with numerous publications including The Washington Post, The Daily Business Review, HealthDay and Time, Inc., and have won numerous journalism awards. Our talented team of contributing writers includes mortgage experts, veteran financial reporters and award-winning journalists. Learn more about the MoneyGeek team.