The world of student loans can be very confusing. Do you know the difference between subsidized and unsubsidized? How does a Direct Plus Loan for parents differ from one for a graduate student? Not to mention the differences between federal and private student loans; searching the Internet can sometimes lead to further confusion and frustration.
Student Loans 101
Luckily, we are here to break down each type of loan into easy to digest nuggets of enlightenment.
First, let’s start with federal student loans. After you have applied for every possible grant and scholarship available to you or your student, start here before even considering a private student loan.
If you are an undergraduate or graduate student with exceptional financial need (as determined by the Free Application for Federal Student Aid – FAFSA), you may receive a low-interest (5%) loan through your college/university. Although this loan is made with government funds, your school will be your actual lender.
Students may borrow up to $5,500 per year as an undergraduate and up to $8,000 per year as a graduate student. The total amount allowed (including undergraduate and graduate studies) is $60,000. You must start paying back the school nine months after you graduate, leave school or drop below a part-time status.
Direct Stafford Loans
Subsidized – Direct Subsidized Loans are offered to undergraduate and graduate students with financial need (as determined by FAFSA). You loans are not charged interest while you are in school at least part-time or during grace or deferment periods.
Depending upon a student’s year in school and status (dependent/independent/graduate), he/she may receive between $3,500 – $8,500 annually, not to exceed $65,500 (includes undergraduate/graduate programs) upon graduation. The current interest rate is fixed at 3.4% (due to increase to 6.8% on July 1, 2012).
Unsubsidized – Direct Unsubsidized Loans are offered to undergraduate, graduate and professional students regardless of financial need. Unlike subsidized loans, the interest on these loans begins to accrue upon disbursement of funds. Students may choose to pay the interest while in college, or have it added to the principle amount of their loan upon graduation.
Loan amounts range between $5,500 and $20,500 with a maximum of $138,500 (undergraduate and graduate combined) allowed over the life of the loans. The current interest rate is fixed at 6.8%.
Graduate and professional students enrolled in certain health profession programs may receive additional unsubsidized Stafford Loan amounts each academic year beyond those discussed above, but the increased aggregate loan amount cannot exceed $224,000 (includes a maximum allowed of $65,500 in subsidized loans).
All Stafford Loans also include an origination fee (1%) per loan received, which is deducted prior to disbursement.
Direct Plus Loans
For graduate and professional students – Any graduate student or professional degree seeking student seeking a Direct Plus Loan must not have an adverse credit history and must complete the FAFSA in order to receive funding. The amount of the loan is the total cost of attendance minus any other financial aid the student may receive.
A four percent (4%) fee is deducted upon disbursement for each loan. The current fixed interest rate is 7.9%.
For parents – Any biological or adoptive (in some cases a stepparent may apply) parent may apply for a Direct Loan, as long as the student is dependent and attending college at least part-time. The parent must not have adverse credit. If he/she is not approved, another person may endorse (co-sign) the loan.
Both student and parent(s) must be U.S. citizens or eligible noncitizens and cannot have defaulted on any previous federal student loans. The annual loan limit is the actual cost of attendance minus any financial aid the student may receive. As with the graduate Direct Loan, there is a four percent (4%) fee per loan and interest (7.9%) begins to accrue upon disbursement, as well.
Private Student Loans
Unlike federal student loans, private student loans are based upon a borrower’s credit history. Since most students are not old enough to establish a stable employment history or earn enough to qualify, most will need a co-signer to secure a loan. Similar to federal loans, private loans cannot exceed the total cost (tuition, fees, housing, living expenses, etc) for a student to attend a school, but the funds may be used for items purchased off-campus and for travel expenses (parking, gas, study abroad).
Rates vary by provider, with many ranging between 2.5% (variable) and 12.9% (fixed). Students can elect to receive the funds directly or have them sent to their school. Private loans often offer a grace period for repayment, as well. Be sure to compare lender offers before making a final decision.
Students and parents should always exhaust all other financial aid options, such as private scholarships, grants and work-study before turning to private loans. Do some research and know what you are getting into before signing on the dotted line.
For those who may have a question or problem with a federal student loan, be sure to contact the Federal Student Aid Ombudsmen Group. For those with private loan issues or complaints, please contact the Consumer Financial Protection Bureau.