2. Start looking for free money now.
While student loans are extremely helpful, they have to be paid back. Grants and scholarships, on the other hand, don’t. Check out free scholarship-matching sites such as fastweb.com, studentscholarshipsearch.com and collegescholarship.org. According to Sallie Mae’s How America Pays for College 2013 report, “free money” now funds 30% of college costs, up from 25% four years ago.
“Too often students wait until the spring of their senior year to start figuring out how to pay for college, and by then they’ve missed half the deadlines that year alone,” says Kantrowitz. He even adds that it’s possible to win college scholarships as early as elementary school through activities like the National Spelling Bee, community service, Doodle 4 Google, and even companies like Jif peanut butter. Or, maybe your parent’s employers offer scholarships, or you can find one related to your ethnic heritage.
But don’t get too optimistic. Only about one in eight students in four-your education programs uses a scholarship to pay for school, he says, and the average amount is $2,800 a year, which won’t cover tuition at most colleges. As for completely free rides? Those go to less than 0.3% of undergraduate students, says Kantrowitz.
3. When you have to borrow, go with federal loans before private loans.
Every year you attend school, fill out the Free Application for Federal Student Aid, or FAFSA, form. With this information, the Office of Federal Aid can help you identify federal grants, loans, and work-study funds to help you pay for school, and schools will base their financial aid packages on this form.
Federal loans offer many advantages over private loans. First, they have fixed interest rates, whereas private loans offer variable rates. Even if you find a low rate from a private lender, nothing will stop it from jumping up the next month. Additionally, having a fixed rate provides some predictability to your budget.
Now, there’s even more reason to go for a federal loan: This summer, rates for subsidized and unsubsidized Stafford loans for undergraduates dropped from 6.8% to 3.68%. For graduates, rates on graduate Stafford loans and on parental PLUS loans dropped from 7.9% to, respectively, 5.41% and 6.41%. “That closes the gap between some federal and private loans — parents were seeing private loans that were lower,” says Michael Clancy, director of financial planning at Drexel University College of Medicine and a certified financial planner. These rates apply for the life of the loan — if rates go up next year, those rates will only apply to loans taken out next year.
Federal loans also offer the advantage of a deferment period, in which the borrower doesn’t have to make payments such as when he or she is enrolled in school or unemployed. Some private loans, on the other hand, ask you to begin repaying the loans immediately. Additionally, federal loans do not require a cosigner who will be obligated to pay the loan back if you can’t, whereas most private loans do. “It’s better