How much should you borrow? Should you go for a federal or a private loan? Here are the answers to these and other key questions.
There are two essential things you need to know about student loans:
Lenders will give you every dime you need to pay for just about any education you desire.
Just because you can borrow doesnt mean you should.
Its not that student loans are bad. Two out of five undergraduates need some kind of loan to get through school, and a reasonable amount of debt can be a good investment in your future.
Lenders, however, will give you far more money than you can comfortably repay. So its up to you to set limits on how much youll borrow and to search for the best possible deals.Start investing with $100.
How much should you borrow?
If youre a student, you should generally limit your debt so that your loan payments after you graduate dont eat up more than 10% of your expected monthly income. To be conservative, figure youll pay about $12 per month for every $1,000 you borrow if you repay the loan over a 10-year period.
If youre a parent, try to keep all your loan payments -- for mortgages, cars, credit cards and education -- to 35% or less of your gross monthly income. If you try to borrow more than 40% under some private loan programs, your application will be turned down.
Federal vs. private loans
Student loans come in two basic flavors: those that are provided or sponsored by the federal government and those that are not. Federal loans tend to have better rates and terms than private education loans, which is why you should generally explore your federal loan options first.
Just because a loan is sponsored by the federal government, however, doesnt mean Uncle Sam will be your lender. Private lenders like Citibank offer federal loans as well as private loans.
Federal loans themselves come in two types:
Subsidized loans, which means the government pays the interest while youre in school
Unsubsidized loans, which means the interest starts accruing as soon as you get the loan (although payments may not be due until you graduate)
Generally, youll want to take maximum advantage of any subsidized federal loan programs for which you qualify before you explore other loans.
How do you know if you qualify? These need-based loans will be offered as part of your financial aid package. Subsidized loans include:
Perkins loans. These come with a 5% fixed interest rate, and you can borrow up to a maximum of $20,000. Perkins loans can be canceled if you work in certain fields, such as nursing, law enforcement, Peace Corps volunteering or teaching in a low-income area.
Subsidized Stafford loans. Stafford loans have a variable interest rate thats capped at 8.25% (but which is currently close to 3.4%). Youll also pay an upfront fee of 4%, which is typically deducted from your payout. You can borrow a maximum of $23,000 total for both subsidized and unsubsidized Stafford loans.
If you dont qualify for a subsidized Stafford Loan, you may be offered the unsubsidized version. As with subsidized Staffords, the rate you pay will be variable. Unlike the subsidized version, however, the government doesnt pay the interest for you while youre in college, so you could have sizeable interest accrued by the time you graduate.
If youre a student paying for college yourself, these loans may still be a good deal compared to whats available from private loan programs. If youre a parent or have access to alternative funding -- such as a home-equity loan that you can lock in at a lower rate -- you might choose that instead.
Theres one other major type of federal student loan program -- PLUS loans for parents. (PLUS stands for Parent Loans for Undergraduate Students.) This program allows parents to borrow the difference between the students financial aid package and the full cost of his or her education, including books, supplies, room, board and other living expenses.
PLUS loans have variable interest rates that are capped at 9%. Currently, the PLUS rate is 4.17%. Unlike the student loans weve discussed so far, however, you have to have decent credit to get these loans, and youll need to start making payments shortly after the money is disbursed.
How do you get these federal loans?
Perkins loans are made by the schools themselves. If the school participates in the Federal Direct Loan program, then Stafford and PLUS loan applications also can be made through the school.
Otherwise, youll need to apply to a bank, savings and loan or credit union that provides money under federal student loan programs. Your colleges financial aid office may recommend lenders, but usually youre free to choose your own.
Most private lenders offer pretty much the same rate and terms on federal loans. You might, however, want to search out lenders that sell their loans to Sallie Mae, which buys many student loans. Sallie Mae tends to offer good repayment incentives, such as a break on interest rates after youve made four years of on-time payments.
What if you need more money?
Once youve exhausted your federal student loan options, you can look to private loans sponsored by not-for-profit organizations or provided directly by banks. Typically, the rates will be slightly higher, the upfront fees greater, interest will begin accruing as soon as you get the money and your repayment options may not be as numerous. Also, your ability to get the loans usually depends on your credit history.
Here are the four main private loan programs for undergraduates:
Sallie Maes Signature Loans
Nellie Maes EXCEL Loans
Wells Fargos PLATO Higher Education Loans
The Education Resources Institutes TERI Loans
For more information, visit the lenders Web sites.
In addition, some private banks offer their own student loan programs, such as Citibanks CitiAssist or Wells Fargo Banks Collegiate Loans. Again, visit their Web sites for more information.
By Liz Pulliam Weston
http://moneycentral.msn.com/content/CollegeandFamily/Cutcollegecosts/P36847.asp
