As your child enters the “getting into college” phase of their lives, there’s a lot to talk about, from whether it’s better to take the SAT or ACT to how many schools they should apply to. At the same time, it’s important to discuss how your family is going to pay for college and, if debt will be part of the equation, how student loans work.
For one reason, the topic is pretty complicated. For another, even if you plan to help repay any student loans, most qualified education loans are taken out in the student’s name, which means they are personally on the hook for repayment. Maybe your student-athlete or scholar is counting on a full ride. While confidence is a wonderful thing, full rides are exceedingly rare.
Here are six student loan concepts you can discuss with your aspiring college student.
1. Here’s What We Think We Can Contribute
It might be uncomfortable to talk frankly about your family finances, but they almost always determine the amount and types of financial aid your child may qualify for.
It can be important for parents to discuss what they’re able to contribute in order to help their young adults wrap their heads around the numbers, too. How much debt they may need to take on to pay for college could impact where they choose to apply to school, since tuition costs vary widely.
💡 Quick Tip: When shopping for a private student loan lender, look for benefits that help lower your monthly payment.
2. Let’s Forge Ahead With the FAFSA
The first step to hunt for financial aid is to complete the Free Application for Federal Student Aid (FAFSA). While this form has a reputation for being long and complex, a new streamlined FAFSA is being released for the 2024-25 academic year. The new form is scheduled to become available by Dec. 31, 2023 — a delay from the typical Oct. 1 release date.
Based on financial need, a college’s cost of attendance, and FAFSA information, schools put together a financial aid package that may be composed of scholarships and grants, federal student loans, and/or work-study.
Awards based on merit (scholarships) or need (grants) are considered “free money” for college. When they don’t cover the full cost of college, that’s where student loans can come in.
If your income is high, should you bother with the FAFSA? Sure, because there’s no income cutoff for federal student aid. And even if your student is not eligible for federal aid, most colleges and states use FAFSA information to award non-federal aid.
3. Interest Rates: Fixed or Variable
Your soon-to-be college student may not know that there are two types of interest rates for student loans: fixed and variable.
Fixed interest rates stay the same for the life of the loan. Variable rates go up or down based on market fluctuations.
You can explain that all federal student loans have fixed interest rates, which are set each year by the federal government, and that private student loan interest rates may be variable or fixed.
4. Federal vs Private Student Loans
Around now your young person is restless. But press on.
Anyone taking out student loans should learn that there are two main types: federal and private. All federal student loans are funded by the federal government. Private student loans are funded by banks, credit unions, and online lenders.
If your child is going to borrow money for college, it’s generally advised to start with federal student loans. Since federal student loans are issued by the government, they have benefits, including low fixed interest rates, forbearance and deferment eligibility, and income-based repayment options.
Private student loans have terms and conditions set by private lenders, and don’t offer the generous repayment options or loan forgiveness programs of federal loans, but some private lenders do offer specific deferment options.
Private student loans can be used to fill gaps in need, up to the cost of attendance, which includes tuition, books and supplies, room and board, transportation, and personal expenses. A student applicant often will need a cosigner.
5. Another Wrinkle: Subsidized vs Unsubsidized
Financial need will determine whether your undergraduate is eligible for federal Direct Subsidized Loans. Your child’s school determines the amount you can borrow, which can’t exceed your need.
The government pays the interest on Direct Subsidized Loans while your child is in college, during the grace period (the first six months after graduation or when dropping below half-time enrollment), and in deferment (postponing repayment).
With federal Direct Unsubsidized Loans, interest begins accruing when the funds are disbursed and continues during grace periods, and the borrower is responsible for paying it. Direct Unsubsidized Loans are available to both undergraduate and graduate students, and there is no requirement of financial need.
Borrowers are not required to pay the interest while in school, during grace periods, or during deferment (although they can choose to), but any accrued interest will be added to the principal balance when repayment begins.
There are annual and aggregate limits for subsidized and unsubsidized loans. Most dependent freshmen, for example, can borrow no more than $5,500, and no more than $3,500 of this amount may be in subsidized loans.
💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.
6. Soothing Words: Scholarships and Grants
It’s important to not overlook the non-loan elements of the financial aid package. They can (hooray) reduce the amount your student needs to borrow.
Scholarships and grants are essentially free money, since you are not required to pay the money back. While some schools automatically consider your student for scholarships based on merit or other qualifications, many scholarships and grants require applications.
You may want to assign a research project to your college-bound young adult to look into all of the scholarship options they may qualify for. There are numerous scholarship finders available online. They may also want to talk to their guidance counselor and the financial aid office of their chosen school to learn about opportunities.
The Takeaway
Debt isn’t the most thrilling parent-child topic, but college students who will need to borrow should know the ins and outs of student loans: interest rates, federal vs. private, subsidized vs. unsubsidized, and repayment options.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
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