Choosing the Right Student Aid Option

Higher education is increasingly becoming a prerequisite barrier to entry for most of the job market. At the same time, Americans are looking for ways to finance that education, and sometimes coming up short. According to the latest debt survey from the Federal Reserve Bank,  outstanding academic loan debt totaled more than $1.4 trillion as of the start of 2017. That means 44.2 million Americans are currently paying off student loans , with a median monthly payment of $203 per borrower.

Since a single year of college can now easily exceed a single parent's salary, more students and their parents have come to rely on federal and private loans to finance college. Reading up on this process in the months prior to the start of school can pay off immensely when it's time to apply for, use and repay those loans.

How to pay for college

While student debt is increasing, most families with college-bound kids do their best to finance their education through other means before turning to loans. A report from loan servicer Sallie Mae found that the average U.S. family is able to cover 43 percent of their total college costs through income and savings.

The rest can be covered by loans, but there are also several other important options that should be considered first, such as:

• Grants
• Scholarships
• Work-study programs

Each of these, as well as federal loans, can be researched and easily applied for by completing the Free Application for Federal Student Aid , or FAFSA. Students can begin submitting their FAFSA on October 1 in the year before they plan to attend college, and must submit it by June 30 in the year they plan to enroll. The FAFSA may be completed and sent online, or filled out on paper and mailed. It can also be completed with the help of a school's college and career counselor or student aid office.

The FAFSA estimates types of aid that a student might be eligible for based on his or her personal and financial information. This will require having a few important documents on hand, including:

• The student's Social Security number.
• Each parent's Social Security number.
• Driver's license or Alien Registration numbers.
• The previous year's federal tax return, and parent's returns for dependent children.
• Records of untaxed income, like child support and veterans benefits.
• Records of financial assets including cash savings, investments and real estate, usually for parents only.

Based on these and other details, the FAFSA will determine which aid programs a student may qualify for, and connect them to the appropriate resources for applying.

Federal vs. private loans

If you still need financial assistance even after taking full advantage of aid programs, most financial experts recommend fully utilizing federal student loan programs before considering private loan options. Federal student loans are sponsored by the U.S. Department of Education, and generally feature more favorable interest rates and repayment terms than what private lenders offer.

Here are some key differences  between federal and private loans:

Subsidized loans

Federal loan programs may pay some or all of the interest on a loan for certain students who have a demonstrated need, as long as they meet enrollment requirements. Most private lenders will not provide this type of assistance, but may defer or reduce payments under certain circumstances.

Repayment

Federal loans only need to be repaid upon graduation or once the student is no longer enrolled full-time. Once they begin paying them back, there may be a grace period or deferment when payments can be stopped or paused.

Interest rates

For the 2017 school year, interest rates on federal loans  range from 4.45 percent for undergraduates to 7 percent for parents, graduate students or professional students. These rates change occasionally but are fixed once borrowers sign on to the program. Private loan interest rates  are often higher, and can be variable once repayment begins.

Loan forbearance and forgiveness

Forbearance is the act of a lender temporarily pausing or reducing loan payments when a borrower demonstrates financial hardship. Federal loan programs allow borrowers to postpone or lower payments for a period of time, as well as refinance or consolidate their debt at a lower interest rate. Private lenders may also offer some of these services, but it is not guaranteed. In addition, federal loan debt may be forgiven, canceled or discharged  for various reasons. Private loans do not operate under these same guidelines.