How to Navigate the Student Loan Process: A Comprehensive Guide
Whether you're a student starting your higher education journey or a parent supporting your child through the process, clear and practical guidance on student loans can mean the difference between overpaying for education or saving thousands of dollars. Fortunately, there are plenty of strategies for paying off student loans faster and finding the best interest rates for private student loans.
For example, did you know your local credit union is an excellent resource for researching student loan options and repayment plans? Credit union student loans also offer some of the lowest private student loan rates around. Not to mention your local credit union has financial advisors who are happy to help.
But first, let's take a look at how the student loan system works so you can navigate this financial terrain with confidence and ease.
What Are Student Loans?
Student loans are borrowed money that can help pay for a student's post-secondary education and expenses, such as tuition, room & board, textbooks, supplies, and other necessities. Like a traditional loan, the lump sum is granted with the expectation to be paid back with interest. However, unlike other types of loans, student loans often have lower fixed interest rates, only require repayment after graduation, and could even have options for loan deferment or forgiveness.
The federal government, banks, credit unions, and other private financial institutions can issue student loans. While all student loans are designed to help students pay for education, different issuers have different application processes, terms, and payment options.
Types of Student Loans and Differences Between Them
The two main types of student loans are federal and private. They each come with their own application processes, terms, and benefits. Here’s how they compare.
Federal student loans
The federal government funds federal student loans. You can apply for them through the Federal Student Aid FAFSA form, which will tell you the types of student loans and other financial aid you qualify for.
The four federal student loan types include:
- direct subsidized
- consolidation loans
The federal government pays part of the interest on subsidized loans but not on unsubsidized. PLUS loans are used to cover additional expenses, and consolidation loans are used to combine payments.
Federal loans have a low fixed interest rate and don't require a credit check or co-signer. In addition, students don't have to begin repayment until after graduation, and deferment, flexible payment, and forgiveness options could be available under certain circumstances.
Private student loans
Financial institutions like your local credit union issue private student loans. You can apply for them online or in person. While private loans are unsubsidized, a wider variety of options are available, so be sure you’re finding the best interest rates for private student loans by shopping around.
For example, some private student loans are deferred until after graduation, while others require repayment while still in school. Additionally, private loans will vary in terms and could have fixed or variable rates and require a credit check or co-signer.
Benefits of private student loans include rewards for good credit history, higher borrowing limits, a statute of limitations for default, and an alternative to federal financial aid.
Eligibility and Applying for Student Loans
Know your eligibility and the application process before starting your student loan journey. Here are a few prerequisites to keep in mind:
- Basic eligibility requirements: Eligibility differs between federal and private student loans. Students must be enrolled at least half-time and meet citizenship or residency requirements for both types. Federal loans require borrowers to complete the FAFSA form. Private loans require a credit check and possibly a co-signer.
- FAFSA form: The FAFSA form is the Free Application for Federal Student Aid offered through the Federal Student Aid office of the U.S. Department of Education. Students can complete the form online to determine their financial aid eligibility and federal loan options. In many cases, colleges will require students to complete the form. Regardless, assessing your aid and loan options is an excellent first step.
- Types of financial aid: Student loans are not the only option for covering education expenses. Take the time to research and understand all available opportunities, including grants, scholarships, work-study programs, and financial aid. While student loans require repayment, grants, scholarships, and aid programs do not.
- Student loan applications: Remember, there are two types of student loans: federal and private. The only way to apply for federal student loans is through the FAFSA form, which will assess your need and give you the loan options available. If the federal loans offered don’t meet your needs, you can explore private loans from banks, credit unions, and other financial institutions to compare terms and interest rates. The private student loan application process will vary by institution.
Understanding Loan Repayment
Ensure you understand student loan repayment and the options available before taking out a student loan. That way, you’re more likely to take advantage of strategies for paying off student loans faster. Here are a few factors to consider:
- Repayment plans: Both federal and private loans offer various repayment options to meet your financial goals. For example, both can typically be deferred until after graduation once you have an income-earning career. Federal loans offer options such as standard, income-based, and extended repayments. Additionally, you can consolidate and refinance private loans to streamline and reduce payments.
- Grace periods: Federal student loans offer a six-month grace period after graduation before repayment begins, allowing you time to find a job and save up before your first payment. Many private student loans also offer grace periods. However, it’s dependent on the specific terms of the loan.
- Loan forgiveness: Loan forgiveness, cancellation, or discharge means you are no longer responsible for the remaining portion of your student loan. Federal loans offer forgiveness programs for students who decide to work in public service and education careers. Additionally, loans could be discharged due to a school closure or disability. Federal student loans are typically not eligible for discharge under bankruptcy; however, private loans may be.
- Consequences of default: Defaulting on a loan means you’ve failed to make payments for an extended time. Defaulting on a loan could lead to accelerated loan repayment, bad credit scores, withheld tax refunds, garnished wages, collection fees, and even court cases.
Strategies for Managing Student Loan Debt
Defaulting on a loan could inhibit your future ability to rent an apartment, purchase a car, or buy a home. So it is important to manage student loan debt and make timely payments. Here are a few strategies to make it easier:
- Budgeting and planning: Incorporate your student loan payment into your overall monthly budget to ensure you have enough funds to cover the expense. Creating a budget will help you visualize where your money is going and where you can cut back.
- Extra payments: Did you know you can make additional payments to repay your student loan faster? Contributing extra money each month to the principal will help reduce long-term interest costs.
- Consolidating and refinancing: Multiple federal and private student loans can be consolidated into one payment. Consolidating loans makes it easier to keep track of your expenses and pay on time. Additionally, private loans can be refinanced at a better rate to help reduce monthly interest payments. It’s one of the key strategies for paying off student loans faster.
- Employer student loan repayment programs: Many larger corporations offer their employees continuing education and student loan repayment programs. Plan a meeting with your employer’s human resources department to discover what options are available.
Credit Unions and Student Loans
There are many student loan options out there, including ones from the federal government, banks, and your local credit union. Credit union student loans are an excellent option for students looking to supplement federal financial aid, consolidate debt, or pay for college in full.
Finding the best interest rates for private student loans is essential. Private student loans may even have lower rates than federal loans based on applicant credit. Credit unions, in particular, because they are not-for-profit organizations, typically have lower interest rates than corporate banks. In addition, credit union student loans frequently come with flexible terms, discount incentives, and financial advice from a trusted professional.
Further Resources on Student Loan Help
Need additional study resources to map out your student loan application and payment plan? Check out these websites:
- Know where to start. First, complete your financial aid application via the FAFSA form to discover what federally assisted programs you qualify for. This will help you determine the right federal or private loan amount to take out.
- Learn what to expect. See how loan repayment will go and compare plans to make the best budgeting decision with the FSA Loan Simulator.
- Compare your options. Comparing scholarships, aid packages, and loans between multiple schools can be confusing. The Consumer Financial Protection Bureau created an easy tool, its CFPB College Planner, to compare all the options.
Ace Your Student Loan Payment Plan
Now that you have the insight, tools, and know-how, you can confidently navigate your student loan applications and ace your repayment plan. Get more understanding of loan terms and consolidation plans from your local credit union team. Use our Credit Union Locator to get started.