Student Loan Strategy

With the fall semester quickly approaching, more and more families are worrying about the financial crunch of college. Plenty of student aid is available, but it is often difficult to decide which type of loans to choose.

If your student is uncertain of what their employment or financial situation will be like at the end of college, it is usually wise to accept federal student loans. These loans are more flexible, allow you to modify your payments and have built in reductions for social workers and teachers. They can also refinanced by some private lenders.

The cheapest federal loans are the Stafford Subsidized Loan and the Perkins Loan. Both options do not accrue interest until after the student has graduated, provided the student stays enrolled full time. (They also cover 6-9 months of half-time enrollment). These loans are available to students who qualify for them based on the results of the FAFSA form.

For other students, the Stafford Unsubsidized loan is an option. This federal loan can be used by any student, regardless of need. However, the Stafford Unsubsidized loan continues to accrue interest even while the student is in school.

There are also numerous lenders willing to give private loans to students. Private loans are usually good options for people with high credit scores. When you borrow a federal loan, the interest rate is not based on how likely you are to default on the loan. Everyone gets charged the same rate. Private loans function differently however, usually giving you a better interest rate if you have good credit. The downside of a lower rate is that private loans often require a parent to “co-sign” on the agreement. If the student fails to make payments, the parent becomes liable for the remaining loan principle and interest.

As your student goes off to school this fall, you should develop a student loan strategy.  Begin by carefully considering which type of loans they may need. If you are a high qualified buyer, you will most likely benefit from private loans. If you need interest free aid, federal student loans are the way to go.