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By Chuck Leddy
Gabriella Maggiacomo was a top student at Providence’s La Salle Academy, where she graduated in 2018. She fell in love with Boston and eventually decided to attend Northeastern University. Now happily finishing up her sophomore year at Northeastern, Gabriella (and her parents) found that choosing a college was a lot simpler than financing a college education.
A college degree remains important for future career prospects. According to a College Ave Student Loans survey, 88% of college students agree getting a college degree is necessary to be successful in their career. The College Board shows median earnings for a bachelor’s degree recipient working full time were $24,900 higher per year than the earnings of a high school graduate. College graduates are also less likely to be unemployed (2.2%) than high school graduates (5.7%). “Over a lifetime, the value of a college degree still pays off in higher salaries and greater wealth,” says Debbie Schwartz, founder of Road2College and Paying for College 101, which educate families about college admissions and paying for college.
Parents are typically close collaborators whenever a student chooses a college and figures out how to pay for it. As Gabriella’s mother Annette Maggiacomo explains, “the entire college planning process is daunting at best, and can become so overwhelming with lots of important decisions you want your child to navigate.” For the Maggiacomo family, that process involved talking to friends, reviewing their savings plan, and consulting with their daughter’s guidance counselor.
“We started to map out how we were going to pay for college,” said Annette Maggiacomo. It all started with the FASFA, Free Application for Federal Student Aid, which is used by the federal government to determine a family’s eligibility for grants, work-study, and federal loans to pay for college. In addition, many states and colleges use the FAFSA to determine a student’s eligibility for financial aid and how much they’ll receive.
While the FAFSA is a critical first step in financing college, it might not provide all the financing a family needs. “Students and families should always max out what is available from the federal government,” says Schwartz. “These loans, called Direct Student Loans, are usually the lowest interest rate loans a student can borrow without a cosigner.” But if a student or family needs to borrow beyond the limit of Direct Student Loans to cover college costs, “they should shop around among private student lenders and compare interest rates,” Schwartz adds.
Private student loans can bridge the gaps
After filling out their FAFSA application, the Maggiacomo family realized that their maximum available amount for federal loans was not nearly enough to cover Gabriella’s education.
“We sat down as a family, outlined the costs, tallied up our savings, and mapped things out,” Annette Maggiacomo says. As part of that process, the family soon recognized that a private loan would need to be an option. The family had done all it could to help their daughter, “but Gabriella needed some [financial] skin in the game too,” Annette Maggiacomo adds.
A private student loan is money borrowed from a bank, credit union, or another private lender that is used to help pay for education-related expenses. “For families with better credit, private loans can provide a tremendous advantage in offering lower interest rates which translates into a lower total cost of borrowing,” says Schwartz. “In addition, private lenders have made their loans very flexible in enabling borrowers to choose variable or fixed interest rates, different options for how long to pay back the loan, and when to start paying it back.”
Making private loans part of a borrowing plan
Completing the FAFSA is the only way students can access federal Direct loans, which are solely in the student’s name and don’t have any credit or income requirements. There are, however, annual limits to the amount of money a student can borrow via Direct loans, and families might need to explore private student loans to cover the remaining costs, as the Maggiacomo family did.
Angela Colatriano, chief marketing officer of College Ave Student Loans, a company based in Wilmington, Del., that helps students and families pay for higher education, explains how the application process works for a private loan.
“Approval is dependent on meeting certain requirements, usually related to income and credit history as specified by each lender,” says Colatriano. Since most students applying to college have little to no credit history and limited income, they may need a creditworthy cosigner, such as a parent, to gain approval for the private loan and to qualify for the best interest rates. “With private student loans, you can borrow up to 100% of your cost of attendance,” says Colatriano. That can include tuition, fees, room and board, and other college expenses.
Private student loans offer variable and fixed interest rates, and borrowers can often choose to make payments while the student is in school or wait until after graduation. “Some lenders, including College Ave, let you choose how long you take to repay the loan as well,” says Colatriano, “which can help you create a monthly payment that fits your budget.”
Bottom line: Borrow responsibly
No matter how students and families borrow to finance college, they need to carefully weigh the costs and benefits, asking relevant questions and collecting as much information as possible. “Borrowing responsibly means understanding the total monthly payments, estimating a student’s post-graduation salary and budget, and shopping around for the best interest rate available,” says Schwartz. If you’re likely to borrow to help cover college costs, check out a student loan calculator now so you can see how different repayment plans impact your monthly payment.
Federal student loans typically have a low fixed interest rate and start with a standard 10-year repayment plan. After students graduate, they also have access to special benefits like income-based repayment and loan forgiveness under certain conditions. “Students should borrow federal first,” says Mark Kantrowitz of Saving For College, “since federal student loans tend to have lower interest rates and more flexible repayment terms than private student loans.”
Private student lenders can also offer competitive rates and flexible terms. “If a borrower or cosigner has excellent credit,” adds Kantrowitz, “they can obtain a private student loan with interest rates that are lower than the interest rates on federal Parent PLUS and Grad PLUS loans.” In addition, private lenders may offer interest rate reductions or cashback for prompt payments, good grades, and graduation. “It pays to be a smart consumer and that includes considering private loans,” says Schwartz, “especially if they fit within your family’s longer-term financial goals and provide lower borrowing costs compared to other options.”
In the end, education is an investment that should be made with care. “Education is one of the most important investments you can make in your child,” says Annette Maggiacomo, “so invest the time and turn to resources and partners you trust.”
To learn more about private student loans for financing higher education, check out the student loan calculator and other useful resources at collegeavestudentloans.com.