How to get student loans for college

Key points

• There are two types of student loans: federal loans from the U.S. government and loans from private lenders.
• Federal student loans have limits on how much you can borrow, so you may need to get private loans to cover the rest.
• There is also a government loan that parents can take out to fund their children’s education.
• Don’t assume you’ll get a lower rate with a federal student loan than with a private loan.

It’s arguable that the most daunting part of college isn’t the workload or living away from home for the first time — it’s the cost. With the average private college costing $55,800 a year, according to the College Board, loans are an inevitable part of the process for many families.

Student loans are a form of education financing, used to cover the gap between financial aid and college costs. They have special features designed for student borrowers, such as in-school deferment and grace periods before repayment begins.

Three-quarters of undergraduate students who apply for financial aid require student loans to pay for college. If you need a student loan, here’s how to get one.

Borrow federal student loans before private student loans

There are two main types of student loans — federal and private — which come with different application requirements. Students should borrow federal first because these loans offer low fixed interest rates, do not depend on credit scores, do not require co-signers, provide flexible deferments, forbearances and repayment plans, and offer generous loan forgiveness and discharge options.

But federal student loans have annual loan limits that may be lower than what the student needs to pay for college, especially at higher-cost colleges. When a student reaches the federal student loan limits, they may need to rely on parent and private loans, which offer higher loan limits.

Types of federal student loans

There are several types of federal student loans:

• For undergraduates: Students are eligible for subsidized and unsubsidized Federal Direct Stafford Loans. Their parents can borrow the Federal Direct Parent PLUS Loan. The annual limits for Federal Direct Stafford Loans are $5,500 to $7,500 for dependent undergraduate students, depending on the year in school, with an aggregate limit of $31,000. The annual limits for Federal Direct Stafford Loans for independent undergraduate students are $9,500 to $12,500 per year, depending on the year in school, with an aggregate limit of $57,500. The annual limits for the Parent PLUS Loan are the cost of attendance minus other aid and other student loans received. There is no aggregate limit.
• For graduate and professional school students: They’re eligible for the unsubsidized Federal Direct Stafford Loan and the Federal Direct Grad PLUS Loan. The annual limits for Federal Direct Stafford Loans for graduate students are $20,500 ($40,500 for medical school students), with an aggregate limit of $138,500 ($224,000 for medical school students). And like the Parent PLUS Loan, the Grad PLUS loan’s annual limit is the cost of attendance minus other aid or loans.

Subsidized vs. unsubsidized loans

Subsidized loans are better than unsubsidized loans because the federal government pays the interest on subsidized loans during the in-school and grace periods, as well as other deferment periods. But eligibility for subsidized loans is based on financial need. Subsidized loans are also limited to undergraduate students. All students, including those without demonstrated financial need, are eligible for unsubsidized loans and the PLUS loans.

Eligibility

To be eligible for federal student loans, the student must satisfy the general eligibility requirements for federal student aid, such as citizenship, having a high school diploma or the equivalent, enrolling in an eligible college or university, and maintaining satisfactory academic progress. In addition, the student must be enrolled on at least a half-time basis.

To qualify for a PLUS loan, the borrower also must not have an adverse credit history, which is defined as having a serious delinquency of 90 or more days on at least $2,085 in debt in the past two years or having a bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination within the past five years.

Repayment options

Federal student loans offer repayment terms of 10, 12, 15, 20, 25 and 30 years. In addition to level amortization (standard repayment and extended repayment), there are graduated repayment and income-driven repayment plans.

You also get more deferments and forbearances than with private student loans. The deferments and forbearances are longer, too, up to three years in total duration, compared with the one-year limit on private student loans.

Federal student loans offer forgiveness options, such as teacher loan forgiveness and public service loan forgiveness. Private student loans do not.

There are also several discharge options, including death and disability discharges, closed school discharges, false certification discharges, unpaid refund discharges and the borrower defense to repayment discharge. Only about half of private student loans offer death and disability discharges.

How to apply for federal student loans

To apply for federal student loans, the student must file the Free Application for Federal Student Aid (FAFSA). The FAFSA is a prerequisite even if the family does not expect to qualify for any need-based financial aid.

Tip: It takes about 30 to 60 minutes to complete the FAFSA.

As the name suggests, the FAFSA is a free form. There are no fees to apply for a federal student loan, although government fees of 1.057% for Direct Loans and 4.228% for Direct PLUS Loans will be deducted from the loan disbursements.

Before filing the FAFSA, however, the student and the parent completing the FAFSA should each obtain an FSA ID at fsaid.ed.gov to sign the FAFSA electronically. Otherwise, they will need to print, sign and mail a signature sheet for the FAFSA to be processed. Signing the FAFSA with an FSA ID yields a quicker processing time, especially if the applicant provides an email address on the FAFSA.

Tip: Up to 10 colleges at a time can be listed on the FAFSA.

A few days to a few weeks after the FAFSA is submitted, the student will receive a Student Aid Report (SAR). The SAR includes the information submitted on the FAFSA and the student’s Expected Family Contribution (EFC). The student should review this information carefully to ensure that it is accurate.

If the student is applying to more than 10 colleges, they can log in to the FAFSA website to delete the old colleges and add new colleges when they receive the SAR, repeating this process as frequently as is necessary, each time waiting until they receive the SAR to substitute a new set of 10 colleges.

The college financial aid office of each college listed on the FAFSA will receive an Institutional Student Information Record (ISIR), which is the electronic equivalent of the SAR. There is one main difference, which is that the ISIR does not include the list of colleges to which the student has applied.

If the student is admitted, the college will send the student a financial aid award letter. The financial aid award letter summarizes the financial aid for which the student is eligible, including federal student loans. The financial aid award letter may mention other borrowing options as well.

Tip: Financial aid award letters typically arrive with or soon after offers of admission, typically in January for early decision and March for regular decision.

Some colleges require students to sign and return the financial aid award letter to confirm the amount of the loans and some do not.

After the student accepts the offer of admission, the student will undergo loan counseling, sometimes called entrance counseling. The loan counseling will emphasize that the borrower is responsible for repaying the student loans even if the student drops out of college or doesn’t like the quality of education.

The borrower must sign a Master Promissory Note (MPN) before the loans can be disbursed. The promissory note is a legal agreement in which the borrower agrees to repay the debt according to a specified set of loan terms, such as the interest rate and repayment plans. The MPN covers borrowing for a continuous period of enrollment of up to 10 years at the college. The student must still file the FAFSA every year.

Federal student loans are generally disbursed at the start of the academic term. Disbursement of federal student loans is delayed by 30 days at some colleges for first-time, first-year borrowers. Federal student loans are first applied to institutional charges for tuition and fees. If the student is living in college-owned or -operated housing, the federal student loans will be applied to room and board as well. If a credit balance remains, it must be “refunded” to the student within 14 days.

Private student loans

Private student loans are available from banks, credit unions and other financial institutions, as well as state loan agencies.

Each lender sets the terms for its own loans. The terms may vary and can include different eligibility criteria, interest rates, fees, loan limits and repayment terms. Private student loans may offer both variable and fixed interest rates. They often do not charge any origination fees, in contrast with federal student loans. They roll the fees into the interest rate. Private student loans typically offer repayment terms of 5, 7, 10, 15 and 20 years.

Typically, eligibility for a private student loan will depend on credit scores, minimum income thresholds, maximum debt-to-income ratios and duration of employment with the current employer. Either the borrower or the cosigner must satisfy these credit underwriting criteria.

More than 90% of private student loans to undergraduate students and more than two-thirds of private student loans to graduate students require a creditworthy cosigner. Most undergraduate students have thin or nonexistent credit histories, so private student loans are made based on the strength of the cosigner’s credit history.

Tip: Borrowers with a higher credit score are more likely to be approved and to get a lower interest rate on private loans.

The student must have reached the age of majority for their state of legal residence. This is age 18, 19 or 21, depending on the state.

There are also private parent loans, which are borrowed by the student’s parents. The student is not obligated to repay a private parent loan, which is made just to the parent.

How to apply for private student loans

At least 30 days before applying for a private student loan, the borrower and cosigner should check their credit reports for errors. Errors on the credit report can affect your credit scores, which can in turn affect eligibility for a private student loan and the interest rates. You can get a free copy of your credit reports at AnnualCreditReport.com. If there are any errors, you can get them corrected by disputing them. The creditor then has 30 days to confirm the accuracy or remove the incorrect information.

To apply for a private student loan, visit the lender’s website.

Tip: There are some student loan marketplace websites that let you apply for loans from multiple lenders. But these websites usually list only the lenders that pay to advertise on the website. Lenders who do not pay to advertise, such as some state lenders and smaller lenders, aren’t listed, even though they may offer less expensive loans.

Shop around for the best loans available to you. The lender with the lowest advertised interest rate will not necessarily offer you the lowest interest rate.

The most important criteria for choosing a loan include:

• Cost: What are the interest rates and fees, auto-pay discounts and other financial incentives?
• Flexibility: Are there deferments, forbearances and repayment plans?
• Quality of customer service: Are there evening and weekend call center hours, and self-service options through the lender’s website?

The only way to know the interest rate you’ll get is to apply for the loan. Some student loan marketplaces will provide an estimate based on a soft credit check, which is usually pretty accurate. A soft credit check does not affect your credit score. All lenders will follow up with a hard credit check when you accept the loan.

Tip: The credit bureaus recognize shopping-around behavior, so if you apply for several loans within a short time period (like one to two weeks), the impact of multiple loan applications on your credit score will be minimal.

When you apply for a private student loan, fixed interest rates will usually depend on a specific repayment term in addition to your credit scores. Lower interest rates will require a shorter repayment term. This is in contrast with federal student loans, which offer the same fixed interest rate to everybody, regardless of the repayment term, and do not depend on credit scores.

The loan application will ask for information that is similar to the information provided on the FAFSA. This will include the student’s name and contact information, the cosigner’s name and contact information, Social Security numbers, the student’s date of birth, citizenship status, income information, the name of the school and a school code, the student’s intended academic major or field of study, the student’s grade level, the student’s enrollment status (full-time, half-time or less than half-time), whether the student wants a fixed or variable interest rate, the requested loan amount, the student’s expected graduation date, and the enrollment period for the loan. The loan application may also ask for one or two personal references.

In addition to the loan application, you may be asked to submit a Private Education Loan Applicant Self-Certification form to provide your cost of attendance and financial aid information. The lender may also ask the college financial aid office to verify your enrollment and the amount of the loan through a process called school certification.

Some lenders use automated underwriting to approve or deny a loan application within minutes. If you are denied, you may be able to request reconsideration by adding a creditworthy cosigner.

Private student loans will provide the borrower with three disclosure forms, one upon application or solicitation, one upon approval and a final disclosure when the loan is consummated.

Caveats about borrowing student loans

There are several warnings about borrowing student loans:

• Do not share your FSA ID with anybody. Your FSA ID is an electronic signature and can be used to borrow student loans in your name. The FSA ID is used to sign the FAFSA and loan applications and to log in to certain government websites. Nobody else has a legitimate need for your FSA ID.
• Beware of application fees or up-front fees of any kind. There are no fees to apply for a student loan, whether federal or private. If you have to pay money to get money, it’s probably a scam.
• Try to avoid borrowing too much. Budget before you borrow. Aim to have total student loan debt at graduation, including both federal and private student loans, that is less than your annual income. Otherwise, you may struggle to repay your student loans.