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There are many types of student loans to help you fund your education, and some may be better for your situation than others. However, before we start talking about student loans, we need to chat about the Free Application for Federal Student Aid (FAFSA).
The FAFSA is the best way to help you qualify for free money in the form of grants, scholarships, and work-study programs. This is money that’s not a loan, and you don’t have to pay it back. In addition to free money, the FAFSA also makes you eligible for the first type of student loan we’d like to discuss — federal loans.
Federal Student Loans
With federal student loans, the U.S. Department of Education is the lender with rates and terms set by law. You can use these student loans for off-campus housing, an on-campus dorm, tuition, fees, books, supplies, and other expenses related to your education. There are three types of federal student loans you should be aware of.
1. Direct Subsidized Loans
These are loans specifically for undergraduate students who have financial need. Students are not responsible for the interest on direct subsidized loans. Instead, the U.S. Department of Education pays the interest. However, this is only while you’re in school at least half-time and during the grace period before repayment, which is the first six months after graduation or leaving school.
2. Direct Unsubsidized Loans
While this may sound similar to the loan above, the main difference between subsidized vs. unsubsidized loans is a student’s qualification and need for financial aid. Unlike subsidized loans, students are responsible for interest on the loan — including during school and the grace period.
There are also annual limits for direct subsidized and unsubsidized loans, and the amount of money you’re allowed to borrow each year will vary. Your school regulates how much you’re allowed to borrow (figuring in cost of attendance and other financial aid). Financial experts recommend that college students max out direct subsidized and unsubsidized loans before considering any other type of loan with potentially higher interest rates.
3. Direct PLUS Loans
Direct PLUS loans are still federal loans but intended for parents and graduate or professional students to help pay for college or career school. Also, these loans don’t carry the same low interest rates as subsidized and unsubsidized loans. As part of the application process, borrowers will undergo a credit check, so the applicant should not have an adverse credit history with a record of poor repayments.
Private & Alternative Student Loans
After utilizing any direct subsidized and unsubsidized loans you qualify for, you still might not have all the money you need to pay for school. Private and alternative loans are additional options to consider. Similar to federal loans, you can use these types of student loans for housing and living expenses, books, tuition, and other education-related expenses.
The lender will usually be a bank, nonprofit organization, credit union, or other financial institution. Interest rates and terms are set by the lender. As a college student with a limited credit history, you may need a co-signer to help your application be approved. There are many private loans available. Here are a few types to consider.
4. Nonprofit Loans
As the name suggests, nonprofit loan lenders aren’t in it for the profits but instead are looking to help support students and parents as they bridge the gap between cost of attendance and financial aid. They want to help students reach their educational and professional goals. In North Carolina, there are a couple of options for student loans — the NC Student Assist Loan and the NC Parent Assist Loan. Both are offered by College Foundation, Inc., a North Carolina nonprofit lender.
- NC Student Assist: This is a private loan for North Carolina residents who attend either in-state or out-of-state schools. It can also be used for out-of-state residents attending a college or university in North Carolina. NC Student Assist loans have competitive fixed rates, the application is free, and there are no prepayment penalties or origination fees.
- NC Parent Assist: This type of student loan is for North Carolina parents of students attending any eligible in-state or out-of-state school, or out-of-state parents who have a student attending a school in North Carolina. Similar to the other loans, the NC Parent Assist Loan has no fees and competitive rates that beat federal Parent PLUS loan rates.
5. Bank and Other Private Loans
Student loans are big business for banks and other private lenders. To increase their margins, rates can often be variable. That simply means the interest rate on your loan can change and potentially increase throughout the lifetime of your loan. In addition to variable rates, private lenders and banks typically have fees associated with their loans. Fees can increase your debt by increasing the amount you have to pay just to borrow. Some common fees include:
- Origination Fee: A fee to process your loan. All federal loans charge origination fees and some private lenders have origination fees as well. This is usually a small percentage of the total amount you borrow. It’s deducted from the loan before it’s disbursed to you, but you still have to repay the entire amount that you borrowed.
- Application Fee: Banks and private lenders often charge nonrefundable fees to process your application for a loan.
Rates can also vary widely from lender to lender, and they may use marketing slogans like “rates as low as” (which really means these rates are only available to the smallest percentage of applicants). Students and parents shouldn’t feel pressured to accept rates and terms that don’t work for them.
6. Credit Union Loans
Much like private bank loans, credit unions also offer student loans. However, you’ll have to be a member of a credit union to get a loan, which can come with extra fees and other banking limitations. Also, like other private lenders, variable rates and loan fees may end up increasing your monthly payments. It’s important to shop around and find a lender that fits your needs and budget.
Finding the type of student loan that’s best for you takes some research. Many students use a combination of federal and private or alternative loans to pay for college. Start by completing the FAFSA to qualify for federal loans, and if you still need additional funds to pay for college, explore your options with private and alternative loans and borrow responsibly.
Nonprofit student loans, like the NC Assist Loan, are often a good choice for families with a North Carolina connection. No matter your choice, take time to think about it and shop around for a loan that matches your needs after all scholarship and grant opportunities have been exhausted. If you’re ready for an NC Assist Loan, complete a student loan application.