Ravinder K

College education in the US is getting more expensive every year. Data issued by the College Board, a not-for-profit organization that helps students prepare for college admissions, reveals that the cost for a year of college for an in-state student is $20,090. If you are from out of state, the amount that you will have to pay will be about $34,220. A large number of students pay for their higher education with borrowed money. But loans are becoming expensive. Interest rates on federal loans were recently raised to 4.45% per year from 3.76%. Private student loans cost even more: But rising college costs and more expensive loans don’t deter Americans from using borrowed money for their college education. There are currently 44 million Americans with outstanding student loans. The total amount payable is a massive $1.4 trillion. What are the different types of loans that you can get and how much do they cost?

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Federal Student Loans

These should be your first option simply because they carry lower interest rates than private loans. Federal loans have other advantages as well. For most of these loans, you don’t need a guarantor or even a credit check. In addition to this, federal student loans offer greater flexibility. Repayments start only when you leave college. In certain circumstances, the government will allow you to postpone your loan payments. You can even get part of the loan forgiven if you opt to become a federal agency employee or take up a public service career. The amount that you borrow will carry a loan fee in addition to the interest that is payable. Interest rates on federal student loans vary from 4.45% to 7%. The loan fee will be 1.066% or 4.264% of the loan amount and depends upon the type of loan you that you opt for. This fee will be deducted from the sum that is disbursed.

Private Student Loans

Remember that a private student loan should really be the second option. Apply for one only if:

  • You can’t get a federal loan.
  • The federal loan that you have been approved for is not enough to pay for your college expenses.
  • You have exhausted your other options. It is better to try and raise money from savings, income grants, and scholarships.

Why should you consider a private student loan as a last resort? The rate of interest that you will pay will depend on your credit score. A low score will lead to a higher rate. Another disadvantage with private student loans is that unlike federal loans, they do not offer income-based repayment plans or a forgiveness program.

Procedure to Obtain a Student Loan

Applying for a federal student loan requires you to submit a Free Application for Federal Student Aid (FAFSA). This is not a one-time exercise. You need to fill out a FAFSA form every year to remain eligible to borrow money under the program. Your FAFSA form will be forwarded to the colleges that you have applied to. Data in the form will also be sent to the state’s higher education agency. Many colleges and state agencies use the information in the FAFSA form to determine your eligibility for financial aid. Applying for a private student loan can be more complicated. The interest rates that banks, credit unions, and other lending institutions charge can vary widely. It is important that you compare the terms and conditions offered by different lenders before finalizing your loan. A private lender will carry out a credit check before approving your loan application. If you don’t have a credit history, it would be necessary to get a cosigner to support your loan.

How to Maximize the Benefit of Your Student Loan

Don’t borrow more than you need. You have to repay your loan, along with interest, and it is easy to fall behind in installment repayments if the sum that you borrow is high. It is also important to understand your obligations before entering into the student loan contract. Repaying your loan on time can help you to build your credit score and give you the ability to get better terms when you want to borrow funds for any other purpose such as buying a house or a car.


1. http://www.studentloanborrowerassistance.org/start-here/federal-loans/consolidation-loans/
2. https://studentloans.gov/myDirectLoan/index.action
3. http://www.finaid.org/loans/privateconsolidation.phtml 

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