It’s time to talk about your funding gap. Now that you’ve calculated your funding gap – the number you get when you subtract your grants and scholarships from your cost of attendance – you have to find a way to cover that gap. Once you have a plan to responsibly pay for school, you can worry less about money and focus on academics. If you have family contributions, personal savings, or other income sources to cover the gap, then we say congratulations! If you need to borrow money to fund your education, then you’ll want to borrow wisely. This article focuses on student loans as an option to help cover your funding gap. We’ll touch on the most common types of loans and introduce the idea of smart borrowing. On your award letter, you may have been awarded a federal Direct Loan.
The two most common types of federal loans are Direct Subsidized Loans and Direct Unsubsidized Loans.
- Subsidized loans are offered to borrowers who show a financial need based on data from their FAFSA. The Department of Education pays the interest that accrues while borrowers are in school. That’s a huge plus as interest that accrues while you’re in school can get pricey.
- Meanwhile, unsubsidized loans are not need-based and the borrower is responsible for paying all the interest that accrues on the loans. Interest starts accruing just after the loan is made. Student borrowers are not required to start repayment on any Direct loans until after they’ve left school, but any accrued interest will capitalize when the loans go into repayment, meaning the interest will be added to your loan amount.
Another federal loan option is the Perkins Loan. This loan option may appear on your award letter if you demonstrate financial need. With the Perkins Loan, The interest may be tax-deductible, federal repayment plans your school becomes the lender and you make payments back to them. Interest is subsidized, which saves you money while you’re in school.
Direct Plus Loan
The final type of federal loan that you might see on your award letter is the Direct PLUS Loan. This type of loan is for parents of dependent undergraduate students and graduate and professional degree students. This is not need-based, so even those with higher incomes may be eligible. There are a few differences between this type of loan and the other federal loan types. First, no credit check is required for other Direct Loans, but a PLUS Loan requires a credit check and those with an adverse credit history may be denied.
While other federal loans have annual limits to how much you can borrow, those who take PLUS Loans can borrow up to the Cost of Attendance minus other aid received. PLUS Loans, for parents, enter repayment as soon as the loan is made rather than after you finish school. For graduate and professional students, payments are deferred while you are in school. There are a number of other benefits to some federal loans. The interest may be tax deductible. Federal repayment plans may be more flexible or forgiving than other loan products, and loan consolidation could make repayment easier. To learn more about these features, talk to your federal loan servicer.
We’ll just mention one more loan product and that is private loans. Private loans are offered by banks and lenders. Private loans are offered by banks and lenders and often have higher interest rates and fewer repayment options than federal loans. After you’ve exhausted your federal loan options, know that you can look to private lenders to help finance your education. Now, if you’re going to borrow for school, you want to be smart about it. Borrowing too much at high-interest rates could cause you tons of headaches after school and cost you thousands of dollars. Remember, all these loans have to be paid back with interest. You need to be a smart borrower.
Look closely at interest rates, as compounding interest can greatly increase the cost of a loan. Maximize their scholarships, grants, and work-study opportunities first. Only borrow what they need and never use student loans to cover non-educational or cost-of-living expenses. Accept subsidized loans options as their first choice of loan. Responsibly borrow federal unsubsidized loans as a next option. Look to private loans as a final option. Borrow with a plan to repay their loans. Create a loan repayment strategy before repayment begins.