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.
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:
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.
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.
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.
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.
Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.