Financing Your Education
Congratulations! You have been accepted to college and decided to attend. Getting into college is very exciting, but you must remember that paying for your education is a significant financial commitment. It is never too soon to start thinking about the best way to pay for your education.
There are a number of sources of financial aid available to you, including: grants, scholarships, federal student loans, and private student loans. Grants and scholarships generally do not have to be repaid, while any loans that you (or others) take out will have to be repaid with interest. You should apply for as many scholarships and grants as you are eligible before turning to loans.
If you must borrow, it is usually best to rely on federal student loan options before turning to private loans.
Choosing The Aid that is Right For You
Once your school evaluates your Free Application for Federal Student Aid (FAFSA), the financial aid office will compile a financial aid package, and send you a letter outlining your aid award. Your award may include grants, work-study employment up to a certain dollar amount, and both federal and private loan options – be sure to recognize the differences between the types of funding that you are offered. Once you decide the amount and type of funding that best fits your needs, you will sign a promissory note that commits you to repaying the loans that you choose.
Borrow only what you need. Remember that you are not required to accept the full proposed financial aid package.
Consider taking any work-study employment offered, provided you can balance your studies with part-time employment.
Comparing Education Funding Sources
It can be difficult to determine how to best finance your education. While every person's specific circumstance is different, there are some general “rules of thumb” to consider that can help guide most borrowers in choosing a suitable aid package.
- FREE FIRST. You should try to exhaust your sources of "free" money that you do not need to repay -- i.e. grants and scholarships, as well as work-study employment -- before taking out any loans.
- THEN FEDERAL. If you have to borrow to finance your education, you need to consider the loan package that makes sense for you and for your family. As a general rule, most borrowers would benefit from exhausting funding from federal loans before turning to private funding.
- SUBSIDIZED IF YOU CAN: You should take out the maximum amount of subsidized federal aid that you qualify for before turning to unsubsidized federal loans. The government pays the interest that accrues on subsidized loans while you are in school, and during any grace or deferment period.
Compared to private loans, federal loans offer:
- CHEAPER COST: Federal loans generally cost less than private loans.
- UNIFORM PAYMENTS: Federal loans have fixed interest rates. Fixed interest rates may help you budget your monthly loan payments. Private loans can have either fixed or variable interest rates, which are often higher than the government’s fixed interest rates.
- CHOICE TO NOT MAKE PAYMENTS WHILE IN SCHOOL: You must begin to repay most federal student loans within six months of graduation or when you otherwise leave school, or attend school less than half-time. By contrast, you must start to repay some private student loans while you are still in school.
- STANDARD REPAYMENT OPTIONS: Federal loans are required to come with a number of repayment plans for the borrower to choose from, including income-based repayment plans, and other flexible repayment options, while private loans are not.
Calculating Total Loan Cost
When you are deciding which loans to accept, be sure to make comparisons based on the loans’ total cost. The total cost of a loan includes three different amounts: the PRINCIPAL, the INTEREST, and the FEES.
- The principal is the original amount that you borrow.
- The interest is the cost of borrowing money from the lender.
- The interest amount accrues over time. Interest rates on student loans can be fixed or variable.
- A fixed interest rate does not change over the life of the loan.
- A variable interest rate can change over the life of the loan.
- Lenders may charge you various fees when you borrow a loan. Common fees include:
- An origination fee, which is charged to cover the cost of providing the loan.
- A deferment fee, which is a charge for postponing the payments due on your loan for a specified period.
To help you understand the total cost of your student loan, private student loan lenders must clearly disclose the loan’s annual percentage rate, finance charge, amount financed, and total of payments before you sign the loan agreement. These disclosures may look something like this:
|Annual Percentage Rate (APR)||Finance Charge||Amount Financed||Total Payments|
The cost of your credit as a yearly rate.
The dollar amount the credit will cost you.
The amount of credit provided to you.
The amount you will have paid when you have made all scheduled payments.
- The Annual Percentage Rate (APR) is the annual cost of borrowing. The APR listed includes any fees that are assessed when you borrow.
- The Finance Charge includes any loan charges that are a condition of the extension of credit (such as interest over the life of the loan and fees assessed at origination).
- The Amount Financed includes the principal loan amount plus any other amount initially provided to the borrower, minus any fees or charges that the lender deducts from the loan balance before providing funds to the borrower.
- The Total of Payments is the total amount the borrower will repay after making all scheduled payments.
Note that your private student loan lender must provide you with loan-cost disclosures at three different points in the application process:
- With any application or solicitation
- Once you are approved but before the loan is consummated
- After you accept the loan
While each disclosure may vary slightly, they all must include the loan’s interest rate, applicable fees and default or late-payment costs, and repayment terms.
You can calculate approximate private student loan costs, with the help of FinAid! The Smart Student Guide to Financial Aid.
Accepting Private Student Loans
Before you sign a private student loan contract, the lender must obtain a self-certification form from you or your school. The self-certification form explains the cost of attending school and your specific aid package. You must sign this form before you accept the private loan to confirm that you know how much extra funding you need to fill the gap between your school’s aid package and your outstanding financial need.
You can accept a private student loan within 30 days of receiving notice that you have been approved for the loan. Once you accept, the lender will provide you with a final disclosure before issuing your loan funds.
Cancelling a Student Loan
Sometimes plans change. You may be able to cancel student loans that you no longer need or want.
Private Loans: You can cancel a private student loan up until midnight on the third business days after you receive the final notice of acceptance. Your lender or school cannot disburse your loan funds until after this three-day cancellation period expires.
Federal Loans: You can cancel your federal loans if you inform your school that you no longer want the loans by the later of:
- The first day of the loan payment period (which can vary based on your program but is generally the start of the academic term).
- If you did give your school affirmative written confirmation of the types and amounts of federal student loans that you wanted for the loan year before your school credited your loan funds, then you can cancel within 14 days after your school notifies you that you have a right to cancel your loans.
- If you did not give your school affirmative written confirmation of the types and amounts of federal student loans that you wanted for the loan year before your school credited your loan funds, then you can cancel within 30 days after your school notifies you that you have a right to cancel your loans.
Tip: You might be able to cancel your federal loan(s) after this time period, but that right is not guaranteed.
CFPB College Cost Comparison Calculator
Once you have been accepted by colleges and receive financial aid offers, you can compare the cost of attending different schools with the financial aid and college cost comparison tool provided by the Consumer Financial Protection Bureau (CFPB). The tool lets you compare the costs of different colleges, including the student loan debt that you’ll owe when you graduate, and estimates the percentage of your post-graduate monthly salary that will go toward paying off your loans.
Co-Signers - What You Need To Know
A co-signer is someone who signs a loan contract or otherwise agrees that they will be liable for the repayment of a loan, even though they receive no money from the loan. One example is a parent or grandparent who co-signs a private student loan.
Private student lenders often require borrowers to have a co-signer to take out a loan. While some private lenders may not require a co-signer, students will generally receive a better interest rate by borrowing with a creditworthy co-signer.
Many co-signers enter into loan agreements without realizing that they can be held responsible for repaying the entire amount of the debt. A co-signer is liable for the loan debt even if the “primary” student borrower has the ability to repay it. Your co-signer should understand the full extent of their liability for your student loan before taking on such an obligation.
Tip: Co-Signer Release: Some private loans offer terms that allow a co-signer to be released from a student lending agreement after a certain number of on-time payments, and depending on the creditworthiness of the original borrower. Check your private student loan contract or call your servicer to see whether this option is available to you and your co-signer.