Loan borrowing and the order in which you do so is one of the most important aspects of the financial aid process.  Before beginning an in-depth search of loan options to consider, be sure to exhaust all forms of free aid (e.g. Scholarships and Grants).  These options will be the most valuable to you in paying for your education because none of the money given to you is to be repaid.  Do not overlook this step, as it can significantly decrease the total cost of attendance that you will have to pay.  If you are unsure of where to start looking for this free financial assistance, websites like the College Board provide you with countless scholarship and grant options, allowing you to make a personal profile to match you with applications that fit your criteria.

Once you have exhausted these resources, you should begin the loan borrowing process.  It is rare that forms of free aid will cover the total cost of attendance in full, so understanding the best order in which to tackle loans will be of utmost importance to you in order to get the most reward for your time spent. The first step to being eligible for any education loans is to complete the required financial aid applications, including the FAFSA and CSS Profile. Once these are completed, you can determine which types of loans you may want and how much you might need. 

Loan Borrowing: The Sequential Guide

After completing your search for scholarships, grants and things of that nature, begin educating yourself on the various types of education loans, and what they offer.  Also, be aware of all deadlines for the college of your choice, so you can be sure to stay on top of things while navigating this process.  Some schools have specific financial requirements unique to their institution, so be aware of all obligations.

Before filling out any loan documents, be sure you have completed the FAFSA and received your results!  The majority of colleges require that this form be completed for admission, and it is not only for need-based financial aid.  The FAFSA is also required for the unsubsidized Stafford Loan, which is available to every individual regardless of need.  You may also be surprised to discover that the results of your FAFSA allow you to be eligible for some need-based loans after all, and you do not want to miss out on these opportunities.

Upon receiving the admission letter from the school of your choice, a financial aid award letter should be with it.  This letter explains the forms of aid and the amount of aid you have qualified for.  Remember that this letter includes suggestions for paying for college and offers made available through that institution; you do not have to accept this specific package.  Once you have reviewed the financial options provided by the school and know how much you have to contribute, you should select a final financial aid package. 

Once you know how much additional financial aid you and your family will need to finance your education, you should delve into finding and selecting the education loans that will give you the most valuable payment plans.  Listed below is the order to consider each loan type, starting with the most desirable option:

  • Federal Perkins
    • This loan for students who portray “exceptional need,” and has a very low interest rate of only 5%.  This subsidized loan has an elongated grace period, with the interest being paid by the federal government while the student is attending school.  The loan forgiveness for this type of loan is also one of the better arrangements.
  • Federal Subsidized Stafford
    • This form of the Stafford loan entails that it is distributed among need-based candidates only, and that the interest is paid by the federal government while the student is in school.  The fixed interest rate on this loan is 6.8%.
  • Federal Unsubsidized Stafford
    • This alternative form of the Stafford loan is available to all students regardless of the financial need they portray.  With unsubsidized loans, the individual must pay the interest while attending school or capitalize it, deferring payments until post graduation.  Capitalizing the loan adds all interest payments to the total loan amount, so that the borrower will have a lump sum to pay at the end of his or her college career.  This loan type has a 6.8% interest rate that increases incrementally while the student is attending school.
  • Federal PLUS Loans
    • The federal Parent Loan for Undergraduate Students (PLUS) allows parents to take out money in order to supplement the financial aid received by their child.  PLUS loans allow parents to borrow funds in order to cover any additional costs not covered by the student’s financial aid package, which can be up to the total cost of attendance.  These loans are the responsibility of the parents, and carry an interest rate of about 8.5%.
  • Private (Alternative) Loans
    • Private education, or alternative, loans are intended to bridge the gap between the total cost of education and the amount the government enables an individual to borrow through federal loan options.  There are no federal forms to complete with these loans, as they are offered through private lenders.

Loan Borrowing Order

  1. Federal Perkins Loan - 5%
  2. Federal Subsidized Stafford Loan - 6.8% (No interest while attending)
  3. Federal Unsubsidized Stafford Loan - 6.8% (Accrues interest while attending)
  4. PLUS Loans - 8.5%
  5. Alternative Student Loans - Based on Credit (usually higher than Federal)

After receiving your maximum Perkins and Stafford Loans, which will be decided by your FAFSA, you may need to borrow additional money to pay for school. The next best option is likely a Parent Loan for Undergraduate Students. This loan acts much like the Stafford Loans, except it is in the Parents name (and has a higher interest rate).

The federally-backed loans typically have lower interest rates since they are guaranteed by the Federal Government. Since you and your parents probably don't have as good of a credit score as the Government, the Alternative Student Loans will likely have the highest interest rate and should be your final option. In order to ensure that you are optimizing your chances of receiving the best education loans, you may want to consider enlisting the services of a qualified financial aid consultant.

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