Back in school this fall? That’s awesome. Paying that tuition bill. Well, that’s probably going to feel less awesome.
Let’s be real: Nearly everyone these days has to use some kind of financial aid to pay for school. However, deciding which types of aid to use and much to borrow might is not always super easy to figure out. Where you get the money, who you borrow from, and the type of loan you take out will all have a major impact on your future payment—and how much you have to repay overall.
In other words, it pays off big time to look at the fine print today.
If you’re in school, planning to attend soon, or researching options for someone else, here’s what you need to know to understand student aid options and save money.
Financial aid for students
Before you take out student loans, you may want to compare the different types of aid you can use. In addition to savings, family contributions, and income from working, students often use one or more of the following:
- Grants and scholarships. Using grant and scholarship money to pay for educational expenses is often the best option as you won’t need to repay the money.
- Work-study awards. Potentially part of a federal student aid offer, a work-study award could make it easier to find a part-time job while you’re at school. Eligible employers, often the school or a local nonprofit, can hire students with work-study awards and the work-study money gets used to pay part of your wages.
- Fellowships and assistantships. For graduate and professional students, fellowships are often similar to scholarships while assistantships are more like work-study awards.
- Federal student loans. Undergraduate students may qualify for direct subsidized or unsubsidized loans through the Department of Education’s Direct Loan program. Graduate and professional students could qualify for Direct Unsubsidized Loans and Direct PLUS Loans. The PLUS loans have a credit history (but not credit score) requirement, although as long as you qualify you’ll receive the same rate as other borrowers.
- Private student loans. Banks, credit unions, states, schools, and online lenders may offer private student loans. However, private student loans should generally be a last resort if you can’t meet your needs with other types of aid or loans. Private student loans are credit-based, meaning your income, debt, credit history, and credit scores can all play a factor in whether the lender approves you and your loan’s rates and terms. Many students have a creditworthy cosigner on their loans.
Applying for federal financial aid
You need to submit a Free Application for Federal Financial Aid (FAFSA) every year to remain eligible for federal financial aid, including grants, work-study awards, and federal student loans. It’s also a requirement for some non-federal grants and scholarships, and some school- and state-based aid opportunities. Submitting your FAFSA early could be beneficial as some types of aid may be awarded on a first-come, first-served basis.
After submitting your FAFSA, review the Student Aid Report (SAR) that the Department of Education sends you and correct errors if needed. If you haven’t decided where you’re attending school, you can have your FAFSA sent to multiple schools and compare their award offers. Otherwise, you’ll only need to review the award letter from your school.
Determining how much to borrow
The award letter(s) you receive shows the different types of financial aid you can accept and the maximum amounts you’re being offered.
You generally want to accept the aid that doesn’t need to be repaid first, which could include grants, scholarships, work-study, and fellowships or assistantships.
Then determine how much money you’ll need for the coming term or year. The aid letter may show an estimated cost of attendance, but it doesn’t necessarily include everything — such as your travel costs if you’re going to school away from home.
Use your school’s Net Price Calculator to get a more realistic look at your price after scholarship and grant money. This will be the amount you need to cover from savings, working, or loans.
If you’re taking out loans, federal student loans offer repayment and forgiveness programs that may benefit you later. Also, although federal loans have a disbursement fee, their fixed interest rates could make them a cheaper option than private loans.
Due to differences in disbursement fees, interest rates, and an interest subsidy, undergraduates should generally maximize their subsidized loan offer before turning to unsubsidized loans. Graduate or professional students should accept unsubsidized loans and then compare PLUS loans and private loan options.
If you’re taking out private student loans, compare your options from multiple lenders, not just those listed on your award letter or recommended by your school. Lenders may have different fees, benefits, and types of loans, and applying with multiple companies could help you find the best-fitting, lowest-rate loan.
Handling loan refunds
Most student loans are sent directly to your school, which will then use the money to pay for your tuition, fees, and cover other expenses. When there’s excess money, the school may send you a refund for the remaining amount. You could put this in a low-fee bank account to use for other educational expenses, such as off-campus room and board, textbooks, and travel.
If you receive a refund and don’t think you’ll need the money, you could use it to make an early payment on your loans. However, you may also be able to cancel a portion of the loan within 120 days, which could save you money on fees and interest.
Saving money on financial aid
In addition to only borrowing what you need, there are some strategies that could decrease your cost of borrowing or limit how many loans you need to take out in the first place.
- Make in-school loan payments. Federal student loans and many private student loans allow you to defer part or all of your payments until at least six months after you leave school. However, most types of students loan start to accrue interest during deferment, and the interest gets added to your principal balance once you start making full payments. Your loan balance could grow as a result, and your interest rate will then apply to the larger amount.
Making interest-only payments while your loans are in deferment can help keep your loan’s principal amount from increasing. It can also decrease your monthly payments after graduation, and save you a lot of money on interest later.
- Lower in-school costs. Your school’s tuition and fees may be fixed, but you could look for ways to save money. For example, you may be able to save a lot of money by living off campus and making meals versus paying for on-campus housing and a meal plan.
- Find part-time and seasonal work. Working during the school year and summers could help you afford early loan payments. Using the money for educational expenses rather than taking out a loan could be even better as loans may have disbursement fees or start to accrue interest right way.
- Keep applying for scholarships. There are scholarship opportunities for students at all grade levels, and you can continue applying throughout the year. You can look online for scholarship databases that let you filter out the opportunities based on your age, interests, degree, deadlines, and other criteria.
Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.