How to Get a Student Loan to Pay for College (Part 1)
Money Girl explains the variety of student financial aid (including loans) available for students and parents to pay for college.
An anonymous Money Girl Podcast listener asks:
“I plan to go to college and then to a 2-year graduate program. What are the different types of student loans and aid that I can apply for? Plus, what tips do you have to make education debts easier to bear?”
The high cost of college can make you think that winning the lottery is the only way to pay for a good education. Fortunately, just about every student can qualify for some type of financial aid or loan.
In this two-part series you’ll learn about the variety of ways students or parents can get the funds they need to pay for college. In part one, I’ll cover federal aid and then in part two, you’ll learn about many other options. Plus, I’ll give you tips for managing student loans once you sign on the dotted line.
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What Are the Different Types of Federal Student Financial Aid?
When someone asks me how to get help paying for school, my first recommendation is to always tap out your federal options.
Why? The fed is the largest source of financial aid. Every year, the U.S. Department of Education awards approximately $150 billion to 15 million students who need help paying for college. You can use the money to pay for a variety of expenses such as tuition, room and board, books, a computer, and even child care.
Some types of federal aid must be repaid because they’re doled out as loans. But other aid is free or allows you to work for it while you’re in school.
Here’s a brief description of the 3 main types of federal student financial aid:
1. Federal grants are one of the best types of financial aid to receive because they typically don’t have to be paid back, unless you withdraw from school.
The most popular is the Federal Pell Grant, which is generally awarded to undergraduates seeking a bachelor or associate degree. The award amount you receive depends on your demonstrated financial need and the cost of your school. For the 2014-2015 academic year, the maximum Pell Grant award is $5,730.
2. Federal work-study programs provide part-time employment for undergraduate and graduate students with financial need. The jobs are generally in community service or related to your course of study, when possible. For instance, you may work on campus for your school, or off campus for a nonprofit organization.
Work-Study programs are a great way to get hands-on experience, learn more about your field of study, and earn income. They’re awarded on a first-come, first-served basis, so be sure to apply for them as early as possible. I’ll tell you how to apply for all types of federal student aid in just a moment.
3. Federal loans are funds sourced from the government to help pay for education expenses, and must be repaid with interest.
Getting loans for college should be your last resort, if you don’t qualify for other types of aid, such as grants and work-study.
Getting loans for college should be your last resort if you don’t qualify for other types of aid, such as grants and work-study. Student loans can really hurt your financial future if you borrow too much and have trouble making payments.
A rough guideline is to never take out more in student loans than your expected annual starting salary. For instance, if you’re a computer engineer living in an area where the average starting salary is $50,000, don’t even think about borrowing more than a total of $50,000 to pay for school.
You may even qualify for a combination of these 3 types of aid, in addition to other types that I’ll cover in part two of this series.
What Are the Different Types of Federal Student Loans?
There are 2 main types of federal student loans: the Direct Loan Program and the Perkins Loan Program.
1. Direct Loans come directly from the federal government in a few different products: Direct Subsidized, Direct Unsubsidized, and PLUS.
- Direct Subsidized Loans are for students with financial need. They don’t require you to pay interest while you’re still in school at least half-time.
- Direct Unsubsidized Loans are for students and are not based on need. They require you to pay all accrued interest on the loan.
- PLUS Loans are available to parents of dependent students, graduate students, and professional-degree students. They are always unsubsidized and require a satisfactory credit check for approval.
2. Perkins Loans are federal funds given to eligible schools to make subsidized, low-interest loans to undergraduate and graduate students. These campus-based loans are reserved for students with the most financial need.
You can learn more about federal loans at the government’s student aid site, studentaid.ed.gov.
See also: Should Students or Parents Pay for College?
What Are the Pros and Cons of Taking a Federal Student Loan?
Some of the advantages of federal student loans include:
- low interest rates that are fixed and can never go up
- flexible repayment options when you have a financial hardship
- a grace period for repayment so you don’t have to make payments until after graduation
- cancelation if you die, become disabled, or make payments for 25 years
- cancelation for doing certain types of public service work after 10 years
- tax-deductible interest up to a certain amount, depending on your income
- subsidized interest, which means interest doesn’t begin to accrue until after graduation, if you demonstrate financial need
There are also disadvantages of federal student loans that every borrower should know:
- maximum loan amounts may not cover all your education costs (see below)
- defaulting or not paying can result in being sued, having wages garnished, not receiving tax refunds or other government assistance
- defaulting could result in being denied a professional license
- defaulting damages your credit, eliminates eligibility to defer payments, and causes you to be denied for future student aid
- you generally can’t wipe out or discharge a federal loan even by declaring bankruptcy
For more information and to learn what actions to take if you default on your loans, see the Department’s Debt Resolution website.
See also: Tips to Tackle Student Loans and Get Out of Debt
What Is the Maximum Federal Student Loan Amount?
The maximum federal student loan amount you can receive increases each year that you’re in school. Additionally, the maximum depends on whether your loan is subsidized or unsubsidized and your dependency status.
For instance, an eligible undergraduate, who’s a dependent freshman, could get a subsidized Direct Stafford Loan for up to $3,500, or unsubsidized up to $5,500. If you were an independent student, you could borrow up to $9,500 for an unsubsidized loan.
See also: Getting Married: How Does It Affect Your Finances?
How to Apply for Federal Student Financial Aid
To apply for any type of federal student aid—including grants, work-study programs, and loans—you must complete the Free Application for Federal Student Aid (FAFSA). If you fill it out online at fafsa.ed.gov, it’s sent automatically to schools you list on the application.
Then you’ll receive notification from those schools about the types of aid and amounts you may be eligible for. You can decline any loan offer or request a smaller loan amount.
Now that you understand the basics of grants, work-study programs, and loans funded by the federal government, join me for part 2 of this series for much more information. I’ll tell you about tips to manage student loans, plus other types of non-federal financial aid that can make your college dreams come true.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
