Unlike student loans, scholarships and grants do not need to be repaid. For more information about the scholarships and grants that may be available, consult your school's financial assistance office.
If you don't/didn't need to take out loans to finance your educational debt, consider yourself very fortunate, enjoy your situation, and find something better to do with your time than read about educational debt. If you've avoided the need for loans because of sound financial planning throughout your younger years, that's very admirable. However, you're in the minority – 89.9% of year-2010 graduates had accrued educational debt.1
Here's a hint: as little as possible! It's easy to sign that piece of paper for thousands of dollars to finance your education at a seemingly low interest rate, but keep in mind that if you repay your loan over an extended time period (which you will likely have to do), the interest you pay could total more than the actual amount of the loan. For example, a loan in the amount of $133,873 will generate $144,877 in interest alone over a period of 25 years – therefore, you will end up paying a total of $278,750 for your loan. FinAid.org provides resources for calculating the interest on a loan (hint: a 10-year, $10,000 loan at 10% interest does not accrue $1,000 or $10,000 in interest).
Don't be afraid to ask for help. Your school's financial assistance office can provide you with counseling and options.
According to FinAid.org, "A good rule of thumb is to borrow about 125% of the difference between your net college costs and the amount of income and savings you can devote to paying those costs, rounded up to the nearest $1,000." FinAid offers a calculator to help you determine the amount you need to borrow.
Federal loans are funded by the federal government and the maximum interest and fees are determined by the federal government.
The interest rate and fees of private student loans are based on your credit score and may vary depending on the school you attend. FinAid.org provides a list of major private education loans.
Stafford Loans are the most common federal loans. "Direct" Stafford loans are administered by schools and are provided by the U.S. government as part of the Federal Direct Student Loan Program (FDSLP). Private lenders (banks, credit unions, savings and loan associations, etc.) provide Stafford Loans as part of the Federal Family Education Loan Program (FFELP).
Stafford Loans can be subsidized or unsubsidized. The federal government pays the interest on subsidized loans while you're in school, whereas you are responsible for the interest payments on an unsubsidized loan while you're in school; you can, however, defer the interest payments until after graduation. All students, regardless of financial need, are eligible for unsubsidized Stafford Loans, but you must demonstrate financial need to receive a subsidized Stafford Loan.
Subsidized Stafford Loans are less expensive than nonsubsidized loans in the long term, and both are less expensive than PLUS Loans but more expensive than Perkins Loans.
The maximum interest rates and fees for Stafford Loans are set by the federal government. Stafford Loans with a first disbursement after July 1, 2006 have a fixed interest rate of 6.8%. The first payment is due 6 months after graduation. The standard repayment term is 10 years, but you can extend the repayment period by consolidating the loans.
To apply for a Stafford Loan, you must submit the Free Application for Federal Student Aid (FAFSA).
Perkins Loans are federal loans awarded to applicants with exceptional financial need. Although the pool of Perkins Loan funds is provided by the federal government, the loans are disbursed by the schools. For graduate students, the limit for Perkins Loan disbursements is $8,000 per year. There is a cumulative limit of $60,000 for the combination of undergraduate and graduate Perkins Loans.
Perkins Loans are subsidized loans with a fixed interest rate of 5%, no origination or default fees, and a 10-year repayment period. The first payment is due 9 months after graduation. These loans are the least expensive of the student loans.
To apply for a Perkins Loan, you must submit the Free Application for Federal Student Aid (FAFSA).
Similar to Perkins Loans, the money for Health Professions Student Loans (HPSL) is provided by the federal government. Among other eligibility requirements, students must be enrolled in a school of allopathic medicine, osteopathic medicine, dentistry, pharmacy, podiatric medicine, optometry or veterinary medicine.
As of November 13, 1998, these loans cannot exceed the cost of attendance, including tuition, other reasonable educational expenses, and reasonable living expenses. The interest rate on these loans is 5%. There is a one-year grace period during which interest does not accrue.
To apply for a Health Professions Student Loan, ask for an application form from your school's financial assistance office.
Although "PLUS" is an acronym for "Parent Loan for Undergraduate Students," the PLUS Loan options available to professional students are not for parents.
As of July 1, 2006, professional and graduate students are eligible for Graduate and Professional Student PLUS ("Grad PLUS") Loans. Like Stafford Loans, Grad PLUS loans are funded by the federal government and disbursed through the Direct Loan Program. These loans are not based on financial needs; eligibility is based on your debt-to-income ratio and FICO score, and an adverse credit history could adversely affect your eligibility. As with the Stafford and Perkins Loans, the maximum interest rates and fees are set by the federal government. The interest rate of Grad PLUS Loans is 8.5%. These loans are generally less expensive than private student loans.
The PLUS loan is limited to cost of attendance minus financial aid already received.
Grad PLUS Loans are supplements to federal Stafford Loans - you must max out your Stafford Loan before you will be eligible for a Grad PLUS Loan. To apply for a Grad PLUS loan, you must submit the Free Application for Federal Student Aid (FAFSA).
Your college may be able to provide you with a preferred lender list, based on a number of factors including available counseling, quality of customer service and the speed of problem resolution.
FinAid.org maintains a list of education lenders who offer student loans.
Some relevant information and tips from FinAid.org for choosing a lender and loan:
Shop around to get the best interest rate and fees, as there is considerable variation from lender to lender.
Expect to pay 2.5-3% more than the lender's best rate.
Look at the difference between the highest and lowest interest rates of each lender – you may get a better rate from a lender with a smaller rate range than one with a wider range.
Look at the lender's highest and lowest rates and expect to fall closer to the higher rate. Less than 10% of the typical loan recipients get the lender's best rate.
Go with the Federal loans first because they have lower interest rates and fees, fixed interest rates and more favorable repayment terms.
Look for lenders that offer discounts on the interest rates and fees on federal education loans, but make sure to identify which discounts provide the best fit for you. FinAid provides a Loan Discount Analyzer calculator to help you make this assessment.
Discounts on unconsolidated Stafford and PLUS loans are often better than those on consolidation loans.
Beware of lenders that require you to repay discounts or rebates if you consolidate the loan with another lender.
Pick the shortest loan term possible to minimize the interest paid over the life of the loan. Choosing a longer repayment schedule reduces the monthly payments, but will extend the life of the loan and can significantly increase the total interest paid. For example, increasing the loan term from 10 years to 20 years may cut the size of the monthly payment by about a third, but it will more than double the amount of interest you pay over the life of the loan. You can change the repayment schedule on your loan once per year, so start with a shorter repayment period and switch to an extended repayment period if necessary.
Given two loans with similar APRs, you should prefer the loan with the lower fees if you intend to pay off the loan within the first few years of entering repayment.
The only way to find out the interest rate and fees for which you are eligible for a private student loan is to apply for one.
Compare the worst (highest) rates when comparing private student loans because the odds are that you will be given the worst rate.
The interest rate and fees of private student loans are based on your credit score and may vary depending on the school you attend. A change of only 30-50 points in your credit score can change your interest rate.
Don't apply for too many private student loans because each year's loan can decrease your credit score and result in a higher interest rate for subsequent loans.
Also, don't apply for more than 2 or 3 private loans because each application could impact your credit score.
For the minimum impact on your credit score, apply for a small number of private student loans and apply for all of them within 1-2 weeks.
If applying for private student loans, you'll get a lower interest rate and fees if you have a cosigner with a better credit score than yours.
If you choose a private student loan, choose one that is pegged to the LIBOR rate than the Prime Lending Rate.
According to FinAid.org, your best loan application "trio" is as follows:
One application to a lender with one of the best rates for the most creditworthy customers;
An application to a lender with a narrow spread between the best and worst rates; and
An application to a lender with one of the lowest worst rates.
Regarding private student loans, FinAid.org recommends limiting your loan applications to the following:
One non-bank specialty lender
Nonprofit state loan agencies in your home state and/or the state where your college is located.
For more information, read FinAid.org's "Tips on Choosing a Lender" on its Preferred Lender Lists page and "Choosing a Lender."
Once you've signed the papers and the loan wheels are set in motion, keep track of your loans. You can use FinAid's Student Loan Checklist as a quick-reference for important loan information.
1. Shepherd AJ and Majchrzak S. Employment, starting salaries and educational indebtedness of year-2010 graduates of U.S. veterinary medical colleges. J Amer Vet Med Assoc 2010; 237: 795-798. Available at http://avmajournals.avma.org/doi/pdfplus/10.2460/javma.237.7.795