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Smart Borrowing

Smart borrowing starts with making smart decisions about where to turn to for college financing. Seeking out scholarships and grants that do not have to be paid back is surely the first step. Next come low-cost federal loans Federal Loan - A federal loan is any educational loan guaranteed by the federal government. Federal loans are processed in accordance with the United States Department of Education regulations and often have different lending criteria compared to credit-based loans. that offer the best possible rates. When both of those avenues are exhausted, then it's time to look for alternative sources of borrowing, such as private student loans Private Loans - Loans that are not sponsored by the federal government. Private loans, funded by private companies, are not subject to the same restrictions as federal loans..

In a 2007 Cognition Financial survey, students and parents both felt that scholarships (95 percent), grants (81 percent) and savings (47 percent) were the top three ideal sources of college financing. Yet in reality, scholarships (65 percent), savings (63 percent) and federal loans (58 percent) are the top sources. The gap indicates many students and families may not be considering the full range of financial aid options available. Loan applicants should avail themselves of free and low-cost aid sources first, using private loans to supplement when necessary, not supplant, federal loans to cover the full cost of education.

Smart borrowing means finding all the free and low-cost financial aid you're entitled to before applying for a private student loan.

Scholarships, grants and savings are the three key financial resources that students and parents should use first to fund college education.

Apply for as many scholarships as you can, both locally and nationally. Use your high school resources or check out our list of scholarship search engines.

Federal and state assistance is available based on your family's financial need.

You should fill out the free Federal Application for Student Financial Aid (FAFSA) FAFSA - Free Application for Federal Student Aid, the standard form students must complete to apply for federal and state need-based assistance/aid programs. This is the first step in the financial aid process. Use it to apply for federal student financial aid, such as a Pell grant, student loans, and college work-study. In addition, most states and schools use FAFSA information to award their financial aid. Visit the FAFSA web site for more information. form. The FAFSA is a government form that does the math on how much your family ought to be able to contribute. You send it in and you get a report back telling how much money you can expect to receive from the federal government for school - some of that money may be a gift that you never need to pay back, and some may be in the form of loans for parents or students, with interest rates subsidized by the government.

The FAFSA site also has worksheets and information about those federal grants (Pell), and federal loans with lower rates (such as the Perkins Perkins - Federally insured loans funded by the federal government and awarded by the school, featuring a low interest rate and repayable over an extended period. The Perkins Loan is awarded to undergraduate and graduate students with exceptional financial need., Stafford Stafford Loan - The Stafford Loan is a fixed-rate, federally-backed loan available to undergraduate and graduate students. The Stafford Loan comes in two main structures. Stafford Loans may be subsidized (the government pays the interest while you are in school) or unsubsidized (you are responsible for interest while in school, though you can defer payments until after graduation). The subsidized Stafford Loan is available if you can demonstrate financial need, but almost all students, regardless of need, are eligible for the Unsubsidized Stafford Loan., and PLUS PLUS Loan - Federal loans guaranteed by the federal government and processed according to DOE regulations. The Federal PLUS loan requires that the student be a dependent of the person filing for the loan. loans).

According to a 2007 Cognition Financial survey, even though scholarships are mentioned as the ideal source of education funding, only two-thirds of survey participants had actually filled out any applications!

Make sure your lender provides you with loan documents that are written in clear, simple language.

Know that interest rates are often variable, so they can and do change over time.

A smart borrower should always know the interest rate they've signed up for, and be aware of the terms of the loan. Be careful not to borrow more than you need or can comfortably repay based on your expected salary after you graduate. Only 8-10% of your pay should have to go toward loan repayments.*

Many students are unaware that they could be penalized for missing a payment, or paying late.

Make sure that you can afford the monthly payments should your interest rate go up. If you have difficulty making payments on time, your lender may provide you with a temporary delay of your monthly payments.

Make sure you are not penalized if you pay off your loan early.

You may have a number of repayment options with a private student loan. Depending on the loan program, you may not have to pay a dime until after graduation (or dropping below half-time), until your education starts to pay off, or you may begin repaying right away and start building that all-important credit history!

Tip: You may be entitled to borrower benefits, for example:

  • You may be able to make full or interest-only payments while in school.
  • You may be able to defer payments until after you graduate.

* Deanne Loonin of the National Consumer Law Center, Tim Ranzetta of Student Lending Analytics, and Mark Kantrowitz of the Web site


Education Calendar

Our handy interactive calendar gives you a heads-up on important dates in the borrowing process.

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