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If you’ve never borrowed money before, applying for student loans can be confusing. You might have to choose between federal and private student loans, for example, or a fixed or variable interest rate. With all your options, it’s crucial to learn how to apply for student loans before entering any kind of contract.
By understanding how to apply for college loans, you’ll be empowered to make smart decisions about paying for your education. This beginner’s guide will go over what you need to know about how and when to apply for student loans.
What to know before applying for student loans
1. Your loans might be federal or private
As a college student or parent of a college student, you have two options for student loans: federal or private. Federal loans come from the Department of Education and are available for any student attending an eligible school.
You can access federal loans, such as subsidized and unsubsidized loans, by submitting the Free Application for Federal Student Aid, or FAFSA. In most cases, it’s smart to max out your eligibility for federal loans before turning to a private lender.
This is because the federal government offers relatively low interest rates and a variety of flexible repayment plans. But since federal student loans come with borrowing limits, you might need more help to pay for school.
In this case, you could turn to private student loans, which come from a bank, credit union or online lender. Unlike federal student loans, you’ll need to meet underwriting requirements for credit and income to get a private loan.
Most undergraduates apply with a cosigner, such as a parent. Although private student loans can help fill the funding gap, be careful about borrowing a loan with a high interest rate. Private lenders typically aren’t so flexible if you run into financial hardship.
2. You may pay interest right away
Whatever type of student loan you borrow, you’ll have to pay back the principal amount and interest. As of July 1, 2018, federal student loans have an APR of 5.05% for undergraduates and 6.6% for graduate students. As of July 1, 2019, federal student loans will have an APR of 4.53% for undergraduates and 6.08% for graduate students.
Private loan interest rates vary depending on which lender you choose and how strong your credit is. Lenders in MagnifyMoney’s private student loans marketplace offer fixed APRs starting at 5.25% and variable APRs from 4.07%.
Because of interest, you’ll end up paying back a good deal more than you borrowed, especially if repayment spans 10 or more years. Plus, interest typically starts accruing from the date your loan is disbursed.
For example, let’s say you borrowed a $30,000 loan at a 5.05% rate. Over 10 years, you’ll end up paying $8,272 in interest. If you can pay off your loan in five years, you could save $4,263 on interest.
Note that subsidized federal loans, which are available to students with financial need, work slightly differently. The government covers interest while you’re in school on subsidized loans, so you’ll only have to start paying interest once your repayment period begins after graduation.
3. You’ll likely have a grace period
As a college student, you probably won’t have a lot of money to pay back your loans. Luckily, federal loans, as well as most private loans, don’t require immediate repayment.
Instead, you can postpone payments while you’re still in school and for six months after you graduate. This deferment is called a grace period, and it lets you focus on your education before having to worry about student loan payments.
But since interest might be accruing, you could choose to make small payments while you’re still in school. If you can swing small payments, perhaps with income from a part-time job, you won’t be facing such a big balance after graduation.
Note that some private lenders require you to make in-school payments, sending your first bill just a month or two after your loan was disbursed. Make sure you understand all the terms and conditions of a private loan before borrowing so you don’t accidentally fall behind on repayment.
4. You have various repayment options
Learning how to apply for student loans is a crucial first step, but you also need to know how to pay them back. Your options will look different depending on whether you’re borrowing federal or private student loans.
Federal student loans come with a variety of repayment plans. The standard plan spans 10 years, but you can opt for a different plan to adjust your bills, such as income-driven repayment or extended repayment.
Income-driven plans, which span 20 or 25 years, can lower your payments and end in loan forgiveness. But if you stretch repayment over two decades, you’ll end up paying a lot more in interest.
If you owe $35,000 at a 5.05% rate, for example, you’d pay $9,650 in interest over 10 years. But if you stretch repayment out over 20 years, you could pay $20,669 in interest. With a 25-year loan, you’d pay $26,688 in interest. So even though your monthly payments feel more affordable on an income-driven plan, you’ll end up paying more on your loan overall.
Private student loans work a bit differently. When you apply, you’ll choose your loan terms, typically somewhere between five and 15 years. After this point, you might not be able to change your terms.
Some lenders will be flexible if you run into financial hardship, and you might be able to choose new terms through refinancing. But you won’t have access to the many plans available for federal student loans, so make sure to choose your repayment plan carefully before applying for student loans from a private lender.
And no matter the repayment plan you select, you can always prepay your federal or private student loans without penalty.
5. Your private loan could have a fixed or variable interest rate
Federal student loans come with fixed interest rates that remain the same over the life of your loan. But private lenders set their own rates and assign the best ones to creditworthy borrowers. Plus, they typically let you choose between a fixed rate and a variable rate on your student loan.
A fixed rate stays constant, while a variable one could rise over time. If you’re spreading out repayment over a decade or more, a variable rate could cost you. But if you’re planning to pay back your loan quickly, electing a variable rate could save you money on interest.
6. You might be able to pause payments in certain circumstances
Even if you have every intention to pay back your student loan on time, you can’t help it if an emergency pops up. Maybe you lose your job and don’t have an income for a few months. Or perhaps you decide to return to school and want to pause payments again.
If you have federal loans, you can postpone payments temporarily through forbearance or deferment. Both programs let you pause payments, but you won’t have to pay interest on subsidized loans during a period of deferment — only on unsubsidized loans.
Forbearance is typically used during times of financial hardship, while deferment is more often used when you return to school, go on active military service, join the Peace Corps or experience unemployment.
Some private lenders also offer forbearance and deferment, but this varies by lender. Plus, there’s not much of a distinction between these two programs when it comes to private loans, since private loans will always keep accruing interest.
If you’re worried about your ability to keep up with payments, consider applying for student loans with a lender who offers this benefit.
7. You could qualify for loan forgiveness or repayment assistance
Depending on where you live and work, you could get some of your student loan debt wiped away through forgiveness or repayment assistance. Federal programs, such as Public Service Loan Forgiveness and teacher loan forgiveness offer partial or total forgiveness after a certain number of years of service in a qualifying organization or profession.
Many states also offer student loan repayment assistance to certain professionals who work in a shortage area or with a high-need population. Several of these programs offer assistance to pay off both federal and private student loans.
A growing number of companies are offering a student loan-matching benefit to their employees to help them cut through debt. If you’re looking to get your debt discharged ASAP, explore your options for loan forgiveness and repayment assistance.
8. You can restructure your debt through student loan refinancing
With Americans owing more in student loans than ever before, many are looking for relief. For some, student loan refinancing can help.
When you refinance, you give one or more of your old loans (federal or private) to a lender. That lender then issues you a new loan in their place, hopefully with better terms.
Creditworthy applicants can snag lower rates on their debt as well as choose new repayment terms, usually between five and 20 years. Not only can refinancing save you money on interest, but it also lets you adjust monthly payments in a way that works with your budget.
Along with these benefits, though, keep in mind one potential downside: Refinancing federal loans turns them private. As a result, you lose access to federal protections like income-driven plans and forbearance.
But if you’re confident you can pay back your loan on time, applying for student loan refinancing could be a strategic way to manage your debt.
Learn how to apply for student loans to pay for college
Most students should borrow federal student loans before turning to a private lender. Submit the FAFSA and you’ll have access to the world of federal financial aid.
But if you need more funding, learn how to apply for student loans with a private lender. You’ll need to fill out an application and submit your (or your parent’s) documents, such as pay stubs and tax returns.
It’s a good idea to shop around with lenders before choosing one. That way, you can find a private loan with the best rate to finance your education.
The information in this article is accurate as of the date of publishing.