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- Nearly 80% of American college students take on some form of financial aid, including scholarships, grants, and federal and private student loans.
- But prioritization of financial aid is crucial. According to the US Department of Education’s Financial Aid Office, students should accept aid in the following order: grants and scholarships, work-study programs, subsidized federal loans, unsubsidized federal loans.
- If the amount offered from the federal lenders won’t make up for the gap in what you can afford out-of-pocket, it may be time to consider a lower-cost college or a private student loan.
- Federal student loans always offer more favorable terms than private loans.
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College in the United States is more expensive than ever, rendering the experience of applying for financial aid almost universal among students.
Nearly 80% of American college students receive some form of financial aid, according to the US Department of Education. Financial aid helps make college more accessible for millions of people, but it’s not all created equal — grants and scholarships are quite literally free money, work-study programs enable students to earn their tuition assistance through part-time jobs, and federal student loans must be paid back to the government, but almost always carry more favorable terms than a private loan.
Many students take on a mix of financial aid to pay for college, and prioritization is crucial. "The rule is: free money first (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans)," the US Department of Education writes on its website, adding that private loans should be the last resort.
With that rule in mind, here are the four types of financial aid, ranked from most to least desirable:
1. Free and earned financial aid
The first step to getting financial aid of any kind is filling out the Free Application for Federal Student Aid (FAFSA), which uses income information to determine how much a student or their family can afford to contribute to college. The application is submitted to the student’s list of up to 10 schools.
If the school determines there is need, an award letter is sent out alongside college acceptances in the spring, which details exactly which scholarships, grants, work-study programs, and federal loans a student has qualified for and how much it’s worth.
If you’ve been offered a scholarship or grant, the US Department of Education’s Financial Aid Office says you should accept it first, after reading over and agreeing to the fine print.
"Make sure you understand the conditions you must meet (for instance, you might have to maintain a certain grade-point average in order to continue receiving a scholarship, or your TEACH Grant might turn into a loan if you don’t teach for a certain number of years under specific circumstances)," the website states.
The next most favorable financial aid a student can be offered is a work-study program. This requires the student to hold a part-time job, usually on campus, to earn tuition assistance. The money earned goes directly toward school costs and does not have to be repaid. However, it’s important to consider the time commitment of a part-time job before accepting a work-study program.
2. Subsidized federal student loan
Only after accepting any free and earned financial aid should a student consider taking on federal student loans, which generally come in two varieties: subsidized and unsubsidized. Students don’t need credit history or a co-signer to take on a federal student loan, and will have access to flexible repayment plans and loan forgiveness.
A subsidized federal loan is the most favorable type of loan for almost anyone, though it’s only offered based on financial need of the student or their family.
Subsidized loans don’t accrue interest during school (as long as the student is enrolled part-time) or during the six months after graduation. Students are only required to begin making payments after that grace period, unless they receive a deferment.
3. Unsubsidized federal student loan
By contrast, unsubsidized federal student loans do accrue interest while the student is in school, beginning from the very first disbursement. However, they also have a six-month grace period after graduation before the student must begin making payments. These loans are not given out based on financial need, but still require a student to submit the FAFSA.
Interest rates for subsidized and unsubsidized federal loans are the same and remain fixed for the life of the loan. For undergraduate loans taken out between July 1, 2019 and June 30, 2020, the interest rate is 4.53%, and for graduate loans the interest rate is 6.08%.
The total lifetime maximum amount of federal loans a dependent undergraduate student can take on is $31,000, but no more than $23,000 can be subsidized. The maximum amount an independent undergrad can take on is $57,500, with the same $23,000 cap on subsidized loans. Graduate and professional students can take on a lifetime total of $138,500 in federal student loans, but no more than $65,500 can be subsidized.
5. Private student loans
If the amount offered from the federal lenders won’t make up for the gap in what you can afford out-of-pocket, it may be time to consider a lower-cost college or a private student loan. These types of loans can come from your college, state government, or private lender (a bank, credit union, or other financial institution), and require usually credit history or a co-signer.
"You’ll have to repay the money with interest, and the terms and conditions of the loan almost certainly will not be as good as those of a federal student loan," the US Department of Education website reads.
Before turning to private loans, make sure you’ve exhausted all federal sources of financial aid. According to the Institute of College Access & Success, just over 1 million undergraduates borrowed private loans in the 2015-16 academic year, but less than half of them took out the maximum allowable amount of federal loans first.
If you do decide to take on private student loans, whether on their own or in addition to federal loans, you may consider refinancing through a lender like SoFi or LendingTree. When you refinance student loans with a private lender, that lender will pay off your remaining balance and consolidate the loans into one loan with a new, more favorable interest rate. It’s possible to refinance both federal and private loans together, but you will lose any repayment benefits of the federal loans in the process.
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