Paying for college and navigating financial aid can be a challenging process. That’s why we recommend our 1-2-3 approach to help you pay for college responsibly:
- Start with money you won’t have to pay back. Supplement your college savings and income by maximizing scholarships, grants, and work-study.
- Explore federal student loans. Apply by completing the FAFSA; you may qualify for a federal loan. Federal loans are not credit-based and may offer useful repayment and loan forgiveness plans.
- Consider a responsible private student loan. Fill the gap between your available resources and the cost of college.
Consider your student loan options
Federal student loans1
Federal student loans are available to U.S. citizens attending eligible higher education institutions at least half-time. The government sets the interest rate, as well as the loan limits, based on the student’s grade level and whether they’re classified as a dependent or independent student. You apply for federal student loans by submitting the FAFSA each year at www.fafsa.gov. The main type is the Federal Stafford Loan, which is available in two varieties:
- Subsidized Stafford Loans are available to students who demonstrate financial need as determined by a federal formula. The U.S. Department of Education pays the interest while the student is in school and during the grace period and deferments.
- Unsubsidized Stafford Loans are available regardless of need. The student is responsible for paying interest that accrues on the loan, including while they’re in school.
Federal PLUS Loans are available to parents who want to help their child pay for school. They’re also available to graduate students. With a PLUS Loan, parents and graduate students may borrow up to the full cost of a student’s education, less other financial aid received.
Private student loans
Private student loans are available to undergraduate and graduate students from financial institutions like Sallie Mae®. They’re designed to fill the funding gap when savings, scholarships, and federal student aid aren’t enough.
Unlike federal student loans, private student loans are not sponsored or guaranteed by government agencies and don’t require a FAFSA. They’re credit-based, which means a borrower’s credit score and history are taken into consideration, along with other factors. That’s why applying with a creditworthy cosigner may increase the likelihood that a student is approved for a private student loan.
There are different types of private loans:
- For students: Private student loans like the Smart Option Student Loan® are taken out by the student with or without a cosigner. Both the student and the cosigner are responsible for the loan.
- For parents: Loans like the Sallie Mae® Parent Loan are taken out by parents or another creditworthy individual. The borrower is responsible for repaying the loan.
Our loans, as well as those of many other lenders, can be used to help cover up to 100% of a school’s certified Cost of Attendance (COA), less other financial aid received.1
We disburse funds directly to a school once the financial aid office certifies the Cost of Attendance (COA).
Federal student loans vs. private student loans: An example
These two examples show the differences in terms of federal and private loans:
- Federal: Mary needs a loan to help fund her bachelor’s degree and her mom wants to help out. Mary’s mom takes out a Federal Direct PLUS Loan after passing a basic credit test. Mary’s mom is the loan holder and solely responsible to pay the loan. The interest rate for the Federal Direct PLUS Loan is a fixed 7.60% with a 4.264% origination fee.1 The standard repayment term is 10 years1 and begins on the final disbursement of the loan. Parents can opt to postpone payments until after their student graduates though interest would accrue during that time.
- Private: After exhausting other funding options, Oscar needs a private loan to help pay for his bachelor’s degree; his dad wants to help out. Oscar applies for a Smart Option Student Loan. Since approval and rates for a private loan are based on a variety of underwriting factors, including credit history and income, Oscar’s dad cosigns the loan to help his son improve the likelihood of approval.
- The loan offers the choice of making payments in school or deferring them until after school2.
- Depending on creditworthiness and other factors, the Annual Percentage Rate (APR) on Oscar’s loan could be from 4.62% to 11.47%2, with no origination fee, if he elects a variable interest rate, but it could go up or down after the loan is approved.
- After Oscar graduates and makes 12 on-time principal and interest payments and meets certain credit requirements, he can apply to release his dad as a cosigner3.
- The repayment term on Oscar’s loan will be between 5 and 15 years, depending on the loan amount4.
Both Mary’s and Oscar’s loans offer loan forgiveness in case of their death or permanent disability5. In addition, interest paid on both federal and private student loans may be eligible for deduction from federal income taxes, subject to certain income restrictions6.
The importance of paying your loan on time
Payment history can affect your future.
On-time student loan payments can positively impact your credit. We encourage customers to make payments online and to participate in auto-debit to reduce the likelihood of delinquency. Some loans may qualify for an interest rate reduction for making payments through the automatic debit program. We alert customers who have missed a payment and remind them to take action to return their account to current status.
For federal student loans, Congress created several repayment options including standard repayment, extended repayment and Income-Based Repayment, which can cap payments at a certain percentage of the borrower’s discretionary income. For private student loans, repayment options vary with the lender and the loan and are typically outlined in the promissory note or contract signed before the loan is accepted.
Making late payments can be reported to all consumer credit reporting agencies, which can have an adverse impact on an individual’s credit health.
If you’re experiencing difficulty paying your student loans, we encourage you to contact your loan servicer to explore whether an alternative payment arrangement is available.