The Borrowing Process and How It Works
For most students, loans are a part of the financial aid package. The financial aid process is important, since it helps you figure out how to pay for college. The borrowing process is part of this.
Before borrowing, make sure you're considered for grants, scholarships and a work-study job. When these are not enough to cover the cost of attending a college, you may want to consider taking out loans.
Loans can supply the funds you need, but they must be repaid. If you need to borrow money to attend college, be sure your federal loan options are exhausted before considering private loans, which often have higher interest rates and less-favorable terms. Meeting college deadlines is important, since some funds are limited and run out.
Take these general steps to be considered for grants, scholarships, and a work-study job, and — if you decide to take out a loan or loans — to navigate the borrowing process:
- Visit the website of each college you want to apply to, learn their priority deadlines for financial aid, and find out about any special requirements they have. Meeting deadlines is important, since some funds are limited and run out.
- Start to educate yourself about the various kinds of financial aid, including your loan options. Share what you learn with your parents and start a discussion about paying for college.
- In your senior year, submit any necessary financial aid forms. Many colleges want you to complete the Free Application for Federal Student Aid (FAFSA).
You can submit the FAFSA any time after January 1. Complete the FAFSA even if you don't expect to qualify for need-based grants and loans. It's required for the unsubsidized Stafford Loan and you may find out that you do qualify for less expensive, need-based loans like the subsidized Stafford Loan. You don't want to miss out on getting the best financial aid package you can. - Colleges may also require you to fill out the CSS/Financial Aid PROFILE®. They might also have their own financial aid forms.
- In addition to your admission letter, usually sent in April of your senior year, you receive a financial aid award letter. It explains how much and which forms of aid you've qualified for. Most likely, it combines gift aid (money that you don't have to repay), loans, and the offer of a work-study position. The letters are suggestions: the colleges are providing information on how they think you can afford to pay for attending. Even if loans are a part of your package, you are not obligated to borrow the full amount offered. They are included to help you close the gap between the costs of the college and what your family can afford to contribute based on the information provided.
- Evaluate and compare your aid awards to see which offers you the best options. The online Compare Your Aid Awards tool walks you through part of this process and performs the necessary calculations. Which Loans Are Least Expensive?
Starting with the most desirable loans, your batting order should be:
- Federal Perkins
- Federal subsidized
- Federal unsubsidized
- Federal parent PLUS
- Private (Alternative)
- Once you’ve reviewed all your award letters, sit down with your parents and evaluate the numbers. Select a financial aid package that works for your family. Once you choose one, all you have to do is sign a promissory note (a contract that specifies terms and conditions) to get that aid package. The financial aid office guides you through the paperwork.
- If your family's share of college costs is more than you can afford, you may want to consider an unsubsidized student loan or a Parent PLUS loan, which requires a credit check.
- If your share of costs is still more than you can afford, and your family can afford to borrow more, you might consider a private loan, also known as an alternative loan. These are less desirable than federal loans and should be taken out only as a last resort. Private loans usually require a good or excellent credit rating and a cosigner, generally have higher interest rates than do federal loans, and have repayment options that differ from those of federal loans.
- Make an informed decision about loans, by comparing the terms and conditions of each offer carefully. These include everything from interest rates and borrower benefits to fees and repayment plans. To figure out how much a loan really costs you in the long run, use the Student Loan Comparison Calculator, which guides you through this process.
Read more borrowing tips.
This information is general in nature and should not be construed as tax or financial advice. Consult your tax adviser or financial planner for more complete information.
