Know the difference between federal and private student loans

Fill out the FAFSA

The Free Application for Federal Student Aid, better known as the FAFSA, is your ticket for qualifying for federal grants, which are free money you don’t

have to pay back. Your FAFSA application is also what determines if you’re eligible for work-study positions, which are federally-funded on-campus jobs, and the application allows you to borrow federal loans, which have better terms than private loans. (More on that below.)

Finally, the FAFSA also is required for many state scholarship programs, and even some outside scholarship organizations that aren’t tied to the government require it. Just like with scholarships, it’s not too late to fill out the form if you haven’t. You have until this end of this academic year to fill out the FAFSA for funding this year.

Understand how student loans work

Understanding how the loans work before you borrow means you won’t have any surprises down the line. First off: Know that just because you are offered federal student loans in your financial aid package doesn’t mean you have to use them or that you have to accept the full amount you’re offered. On the other hand, if you initially declined some of the federal loans you were offered for this academic year, but now realize you need them, talk to your financial aid office about accessing the rest of them.

For federal loans, interest rates are fixed, meaning the rate will stay the same until you pay off your loan. Rates are set each year; the current interest rate for undergraduate borrowers is 2.75%, while it’s 4.30% and 5.30% for graduate and parent loans. Interest rates on private loans are typically higher than federal loans, unless you have a stellar credit history, and the rates can be either fixed or variable. A variable rate changes over time, going up or down, based on economic conditions.

Unless you have a subsidized federal loan, interest starts accruing as soon as you take the loan out, which means your loans will grow while you’re in school unless you take steps to pay off the monthly interest. When you do make a payment (whether you’re enrolled or out of school), the money goes first to cover accrued interest, then the remaining amount goes toward the principal balance.

If you need to pause your repayment for whatever reason, interest can be capitalized. This means the unpaid interest is then added to your principal balance, increasing the amount your future interest will be based on.

Consider your future earning potential

Whether your student loans are manageable depends in large part on how much you’re earning. A graphic designer earning $52,000 a year may struggle to repay a $50,000 debt more an engineer earning nearly $100,000. That means it’s smart to have an idea of your future earning potential before you start taking on debt. Mark Kantrowitz, publisher at Savingforcollege, recommends borrowing no more than your anticipated first year’s salary. Otherwise, you may struggle to afford your monthly payments. You can find salary projections on websites, such as Salary or Glassdoor or by searching job sites for listings to something similar you’ll be looking for when you graduate.

There are big differences when it comes to federal and private student loans. Federal loans come with benefits that private loans don’t offer including loan forgiveness possibilities, income-driven repayment plans, and more options to defer loans if you lose your job or are struggling financially. Federal loans also offer some need-based subsidized loans where the interest is paid during times of deferment.

Because of the flexible payment options and other benefits that come with federal loans, most payday loans Virginia experts recommend sticking to those and avoiding private loans altogether. Still, about 5% of undergraduates used private loans in 2015, according to The Institute for College Access and Success.