Knowing how to go about applying for student loan aid is crucial if you want to accomplish your end goals, and pay the least amount of money for your financing. There are several different types of student loans, including federal student loans, private student loans, parent student loans, consolidation loans, and even peer-to-peer education loans.
I recommend to students that they apply for each of these in a specific order:
- Stafford +Perkins Loans (FAFSA) > PLUS Loans > Private Loans > Peer-to-Peer Loans > Consolidation
Federal Student Loans and State-based Aid
You should always apply for federal student loans first before you consider any other kind of financing. You can apply for federal loans via the FAFSA, and by submitting one by June 30 you will be put into contention for both of the Stafford Loans, and perhaps the Perkins Loan if the school you plan on attending participates in the Perkins Loan Program.
Stafford Loans are part of the Direct Loan Program and are made by the Department of Education, while the Perkins Loan is a campus-based loan program that involves funding by your school.
Stafford Loans have low and fixed interest rates, and the available loan amounts will depend on your current year in school. There are two Stafford Loans—the Subsidized Stafford Loan, and the Unsubsidized Stafford Loan.
The subsidized version is based on need, and does not accrue interest while you are in school. The unsubsidized version in not based on need, and does accrue interest while you are in school. You can get both Stafford Loans for any particular award year.
Perkins Loans are need-based federal student loans that carry a low and fixed interest rate. They are much less prevalent than Stafford Loans, partly due to the fact that only about 1,800 schools from across the nation participate in the Perkins Loan Program.
- You must exhibit a very high financial need in order to get the Perkins Loan, and the way that this is measured by the Department of Education is via your expected family contribution.
State-based Aid
Most students overlook the potential for getting state-based aid, either in the form of grants, or student loans. The truth is that there is an abundance of state-based aid available each year, and the key to applying for such aid is to first complete the FAFSA.
You may automatically be considered for certain types of state-based aid by submitting this application, and if you want to broaden your scope a bit, you may want to contact either your school’s financial aid department, or government office to see what specific aid that they may have available for that school year.
Parent Student Loans
Parent student loans are PLUS Loans, which are federal student loans that are made as part of the Direct Loan Program. I didn’t include them in the previous section because they exemplify several different major characteristics when compared to the Perkins, and Stafford Loans.
- First-off, they are based in-part on credit, and you therefore need to either have a good credit score, or a creditworthy cosigner to get an approval.
They also require a separate application that is distinct from the FAFSA that you must acquire from your school’s financial aid department. They are called “parent” student loans because you must have your parents apply for them when you are still an undergraduate student.
Once you become a graduate, or professional student you can apply without your parents. They carry a fixed interest rate that is set at 7.9%, and you can borrow up to the cost of attendance with this type of education loan.
Private Student Loans
Private student loans are different from federal student loans in many ways, with the primary differentiating characteristic involving who the actual lender of the loan is, as private education loans are made by independent private lenders and not the Department of Education.
- This type of student loan is based on credit, and you therefore need to have a good credit score, and a substantial credit history to get an approval.
They typically cost more than federal student loans in terms of the interest and fees you’ll have to pay, and they will also usually come with less repayment benefits as well. For this reason I recommend that you apply for private education loans oly after you have exhausted your federal student aid options.
The primary advantage of this kind of student loan has to do with your borrowing capacity, as you are able to borrow up to the cost of attendance minus any financial aid on a yearly basis.
Peer-to-Peer Education Loans
Peer-to-peer education loans are student loans that are provided by individual people instead of financial institutions such as banks, or credit unions.
Also commonly referred to as person-to-person student loans, and microfinance education loans, these loans are provided by individuals who typically participate in online lending communities such as fynanz.com, or greennote.com.
Websites such as these act as intermediaries between both the individual who is funding the student loan, and the borrower who is accepting the proceeds of such a loan. The loans are based on credit most of the time, and can range in value from a few hundred dollars, all the way up to the cost of attendance.
This type of student loan will carry a wide-range of interest rates and fees, and it is in your best interest to at least consider this option if you have already exhausted other forms of aid such as federal student loans, and parent loans.
Student Loan Consolidation
Student loan consolidation involves the process of paying off all of your individual student loans with another loan. This is done to make the repayment process more convenient, and to hopefully lower monthly payment amounts.
- How you go about consolidating your student loan debt will depend heavily on whether you have only federal student loans, or both federal loans, and private education loans.
If you only have federal student loan debt, it is in your best interest to apply for the Federal Direct Consolidation Loan, as this is a consolidation loan that is provided by the Department of Education.
If you have both federal student loan and private student loan debt, you will have to locate a private lender that is willing to provide you with a consolidation loan, as the Direct Consolidation Loan is only able to consolidate federal debt.
You should have no trouble locating a lender for your private student loan debt, although most lenders will not be able to consolidate both private, and federal debt. The key to being able to get a private consolidation loan is having good credit, as most private consolidation loans are based on credit, and therefore require you to have a good credit score, and substantial credit history to get approved.
