For those who demonstrate sufficient financial need, the government will pay the interest on “subsidized” Stafford loans for students while they are enrolled in college. Otherwise, loans accumulate interest while a student is in school, and the student may either pay that interest as it comes due or let it be added to the principal balance.
Where to begin? With a first step that unfortunately is not easy — filling out the Free Application for Federal Student Aid, or FAFSA. There was talk in Congress earlier this year of simplifying this form, which is long and detailed, but no changes have been approved by lawmakers yet. The good news is, it is free and can be completed online. The reward for slogging through it is eligibility for the federal loans, which may save a borrower hundreds or thousands of dollars in interest.
Any borrower’s first choice, of course, would be the Perkins loans, for those who qualify. Then look to see if your school participates in the direct federal loan program.
For those taking out bank-issued federal loans, some shopping around is in order. There are some differences in the loans being offered — but not ones that are easy to weigh.
For instance, even though the maximum interest rate is fixed, some lenders will offer discounts ? for example, cutting the interest rate or reducing the principal balance ? to borrowers who meet certain targets. In some cases, borrowers who make 36 consecutive on-time loan payments may qualify for certain reductions.
Financial aid administrators advise caution when considering these benefits. First, few ex-students are such punctual borrowers, so the benefit is worthless to many. By some estimates, fewer than 10 percent of borrowers end up getting such benefits.
Second, of those students who do meet the target, not all remember to ask for it, and the lender has no obligation to provide reminders
Students should look for benefits that they receive immediately, not in future years, like waivers of loan origination or loan guarantee fees. That is money that the borrower saves right away, and can spend on something useful, like books or pizza.
These are basically just like any other consumer loan from a bank or student loan company. The interest rates charged on private loans are almost always higher than those on federal loans, and the interest rates can change over time.
The interest rates on these loans also vary from lender to lender and from borrower to borrower, leading some to describe the private loan market as the “wild west” of the student loan industry. Because there is so much variability in loan terms, students must apply for a loan merely to find out what rate they might have to pay. This can be time consuming, but it is better to shop around than to accept a rate that is going to make repayment difficult. The rates charged can vary dramatically.
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Because private loan interest rates change over time, it is more difficult for borrowers to predict their monthly payments in the future. In general, students should borrow as little as they can in the form of private loans, no matter how much easier the application process is than the FAFSA.
For those students who need to borrow more money than is available through a federal loan program, there are “private” or “alternative” loans
Private loans also do not enjoy some of the protections that federal loans provide, such as the possibility of temporary deferment or forbearance ? meaning that a borrower does not have to make payments on a loan under certain circumstances. There is more information about how to cope with repayment difficulties for federal loan borrowers.