Before pursuing a loan, there are a number of steps you should take to ensure you find the right financial fit. This begins with having a clear understanding of your payment options and responsibilities, according to Rick Castellano, VP of corporate communications at Sallie Mae. He suggests scheduling a time to sit down with your family to discuss your options and expectations.
“We find time after time that the families who sit down and work out a plan are better equipped to pay for college,” Castellano said in an interview with Fortune. “You want to go into this with your eyes wide open and managing expectations of how much debt you’ll carry after.”
Among the topics you should discuss are how much savings have been set aside for tuition, how much debt you’re willing to take on, and what your plans are after college.
Once you’re settled on that, your first step is to fill out a Free Application for Federal Student Aid (FAFSA) form, Castellano said. The FAFSA provides billions of dollars in financial aid in the form of scholarships, grants, work-study programs, and federal loans.
What Types of Federal Student Loans Are There?
In terms of federal loans, there are two basic types: subsidized and unsubsidized. Subsidized loans are based on need, and the U.S. Department of Education pays the interest while you’re in school. Unsubsidized loans require you to pay off all of the interest during the full term of the loan.
The FAFSA application period opens on Oct. 1 every year, with aid awarded on a rolling basis. The application period for the 2022-2023 school year is still open.
Before settling on a loan, you should look into scholarships and other non-loan options. A good resource is Sallie Mae, which lets you research millions of different scholarships. You should also get in touch with your college’s financial aid office to learn about the scholarships it offers. Another option is to check your state’s education agency to find out whether it offers any aid programs.
Federal Student Loans vs. Private Student Loans
If you can’t find non-loan options, you’re probably better off with a federal loan rather than a private loan, experts say.
“Federal loan interest rates are usually lower, and they have more flexible repayment options,” Liz Frazier, a certified financial planner and executive director of financial literacy at Copper Banking, told Fortune.
Another advantage of federal loans is that you don’t need a credit history to qualify for one. That’s not the case with private loans, meaning you might need to get a co-signer. In addition, certain borrowers with federal loans can qualify for forgiveness programs such as the Public Service Loan Forgiveness (PSLF) program. Federal loans also offer income-based repayment programs in which monthly payments are determined by income and family size.
Just make sure you don’t depend on loan forgiveness when taking out a loan. Assume that you will have to pay off the full loan at the agreed-upon terms, and come up with a plan to do so.