- Almost 80% of U.S. students receive some form of financial aid, including federal and private scholarships, grants, and student loans.
- The US Department of Education suggests that students accept aid in the following order: grants and scholarships, co-op programs, subsidized federal loans, unsubsidized federal loans.
- If the amount offered by federal lenders won’t close the gap in what you can afford, it may be time to consider a lower cost college or private student loan.
- Federal student loans always offer better terms than private loans.
- Learn more about obtaining or refinancing a student loan with CommonBond »
University in the United States is more expensive than ever, making the experience of applying for financial aid almost universal among students.
Almost 80% of American students receive some form of financial aid, according to the US Department of Education. Financial aid helps make university more accessible to millions of people, but not everything is created in the same way – grants and scholarships are literally free money, work-study programs – studies allow students to earn their help with tuition fees through part-time jobs, and federal student loans must be repaid to the government, but almost always have more favorable terms than a private loan.
Many students accept a combination of financial aid to pay for their education, and prioritization is crucial. “The rule is: first free money (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans)”, writes the US department Education on its website, adding that private loans should be the last resort.
With this rule in mind, here are the four types of financial aid, ranked from most to least desirable:
1. Free and deserved financial assistance
The first step in obtaining financial assistance of any kind is to complete the Free Application for Federal Student Assistance (FAFSA), which uses income information to determine how much a student or their family can afford to contribute. at University. The application is submitted to the student list of up to 10 schools.
If the school determines there is a need, an award letter is sent out in the spring with college acceptances, which details exactly what scholarships, grants, co-op programs, and federal loans for which a student qualified and how much is it worth.
If you have been offered a scholarship or grant, the United States Department of Education’s financial aid office says you must accept it first, after reading and accepting the fine print.
“Make sure you understand the conditions you need to meet (for example, you may need to maintain a certain grade point average to continue receiving a scholarship, or your TEACH grant could turn into a loan if you don’t teach not for a number of years under specific circumstances), ”the website says.
The second most beneficial financial aid a student can be offered is a work-study program. This requires the student to take a part-time job, usually on campus, to earn help with tuition fees. Money earned goes directly to tuition and does not have to be refunded. However, it is important to consider the time commitment of a part-time job before accepting a work-study program.
2. Federal subsidized student loan
It is only after accepting free and deserved financial aid that a student should consider taking out federal student loans, which generally come in two forms: subsidized and unsubsidized. Students do not need a credit history or a co-signer to take out a federal student loan and will have access to flexible repayment plans and loan forgiveness.
A federal subsidized loan is the most beneficial type of loan for almost everyone, although it is only offered based on the financial needs of the student or their family.
Subsidized loans do not bear interest during study (as long as the student is enrolled part-time) or for six months after graduation. Students are only required to start making payments after this grace period, unless they receive a deferral.
3. Federal unsubsidized student loan
In contrast, unsubsidized federal student loans to do earn interest while the student is in school, from the very first disbursement. However, they also have a six-month grace period after graduation before the student is required to start making payments. These loans are not awarded on the basis of financial need, but still require a student to submit to the FAFSA.
The interest rates for both subsidized and unsubsidized federal loans are the same and remain fixed for the life of the loan. For undergraduate loans taken out between July 1, 2020 and June 30, 2021, the interest rate is 2.75% and for graduate loans, the interest rate is 4.30%.
The maximum total lifetime federal loan amount that a dependent undergraduate student can take out is $ 31,000, but no more than $ 23,000 can be subsidized. The maximum amount an independent undergraduate can accept is $ 57,500, with the same limit of $ 23,000 on subsidized loans. Graduate and professional students can take out a lifetime total of $ 138,500 in federal student loans, and no more than $ 65,500 can be subsidized.
4. Private student loans
If the amount offered by federal lenders won’t fill the gap in what you can afford out of pocket, it may be time to consider a lower cost college or private student loan. These types of loans can come from your university, state government, or a private lender (a bank, credit union, or other financial institution) and usually require a good credit history or a co-signer.
“You will have to repay the money with interest, and the loan terms will almost certainly not be as good as a federal student loan,” the US Department of Education website says.
Before you turn to private loans, make sure you have exhausted all federal sources of financial aid. According to the Institute of College Access & Success, just over one million undergraduates borrowed private loans during the 2015-2016 academic year, but less than half of them d ‘first contracted the maximum authorized amount of federal loans.
If you decide to take out private student loans, either alone or in addition to federal loans, you may want to consider refinancing through a lender like SoFi or LendingTree. When you refinance student loans with a private lender, that lender will pay off your remaining balance and consolidate the loans into one loan with a new, lower interest rate. It is possible to refinance both federal and private loans, but you will lose any federal loan repayment benefit in the process.