There are many different ways students and their families can pay for their higher education. Maybe you got a scholarship that will cover costs, or your parents are paying for it from their savings or a 529 account. If you’re paying for college on your own with a student loan, you’re not alone! Loans are one of the most popular and widespread methods to cover college costs.
Taking out a student loan can provide comfort and security if you pay for your education independently. With the amount dispersed at the beginning of the semester, students can budget out how much is needed to pay for costs such as books, living expenses, food, etc.
There are many different types and terms to be aware of when it comes to understanding student loans, so let’s break it all down together.
Before we talk about loans, we first need to touch on FAFSA, the Free Application for Federal Student Aid, which is necessary to be eligible to receive federal financial aid. Also, states and colleges use your FAFSA information to award their own financial assistance for students like grants and scholarships. However, because assistance is limited, there are some deadlines you will have to meet!
To learn more about Federal and State FAFSA deadlines, visit Federal Student Aid online.
Federal Loans Available for Students
The U.S. Department of Education offers two different types of loans to help eligible students cover the cost of higher education at a four-year college or university, community college, trade, or technical school.
Typically, students can take out two different types of loans after they fill out their FAFSA forms: Subsidized and Unsubsidized.
How much can I borrow?
There are limits on the amount of money you may be eligible to receive each academic year, annual loan limits, and the total amounts you may borrow for undergraduate and graduate degrees, or aggregate loan limits. The actual loan amount you are qualified to receive each academic year may be less than the annual loan limit. These limits vary depending on:
- What year you are in school
- If you are a dependent or independent student
Subsidized Loans are loans for undergraduate students with financial a need determined by your cost of attendance minus expected family contribution and other financial aid (such as grants or scholarships). One of the best features of this type of loan is that interest, or the cost of borrowing money, doesn’t start accruing or adding to your loan total during your school enrollment. It will only begin adding interest after graduating or if you stop being a full-time student.
In other words, it doesn’t cost anything for you to borrow this money to pay for school, and it can make it faster for you to pay your loans back after graduation.
- Individual schools will let you know if you qualify and, if you do, how much you are eligible to receive.
- Six months after you leave school, also known as a grace period before payments start, your loan doesn’t accrue interest.
Another type of federal loan is an unsubsidized loan. With a federal unsubsidized loan, you will begin gaining interest from the loan the second money is deposited into your account. You’re accountable for the entire amount and will not get help to repay the interest. However, you are not required to start paying back this loan until after graduating.
So, if you take out an unsubsidized loan your first year of college, you will have years worth of interest added to your loan before you ever graduate, making it more expensive.
- Eligibility isn’t considered need-based and is available to most students who file the FAFSA.
- Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive.
- For more questions regarding federal student loans, visit Federal Student Aid.
Rates, Fees, and Borrowing Limits
Understanding the different limits and rates can be one of the most confusing parts of getting a federal loan to pay for school. There are different interest rates, loan amounts at each level, and loan amounts for the various types of degrees. Here are the break downs for what is available to students if they choose to take out a federal student loan to pay for their education:
Student loans have fixed interest rates for the life of the loan but can change each year.
● The expected rate will be 4.99% for loans disbursed on or after 7/1/22
● 1.057% Origination Fee (Disbursement Fee)
The limits for dependent undergraduate borrowers who are reliant financially on their parents:
- Can borrow up to $31,000
- $7,500–Junior and Senior
The limits for undergraduate borrowers who are independent of their parents financially:
- Can borrow up to $57,500
- $12,500–Junior and Senior
- $20,500 – Graduate or Professional Student
Other Types of Loans
Federal Student Loans aren’t the only loans available to you, and you should look at all the options available to you and see what is best for your financial situation.
Private Student Loan
This type of loan is when you as a student go directly to a private lender such as a bank, credit union, online lender, etc., to receive funds to pay for school. There are some different criteria to be able to take out this type of loan because you will need to use your credit score to determine what amount you are eligible to receive and the cost of your interest rate. In other words, the better your score, the lower the interest rate. This loan will be taken out in the student’s name and usually requires a cosigner since students typically don’t have a long credit history.
- Typically allow you to borrow up to the total cost of attendance
- Cosigners should ask about the lender’s cosigner release criteria
- Most private student loans do not have origination fees
Private Parent Loans
Like the private student loan, your parents can also get a line of credit from a private lender to pay for your education. Usually, parents have better credit history and can potentially get a better interest rate. As a student, your name will not be anywhere on this loan, and you will not be responsible for paying back the loan amount.
- Allow you to borrow up to the total cost of attendance
- Most private parent loans don’t have origination fees
One significant difference between federal and private loans is that if loan payments are deferred or paused by the U.S. Government, you are not required to continue payments like what happened during the pandemic. Also, while paused, you won’t accrue interest on your loan. However, a deferral doesn’t apply to you if you have a private loan, even though it was to pay for your education.
This can present problems for students if they’re starting out and trying to get their footing in their careers. A first job after graduation likely doesn’t pay very well, and if you’re required to put hundreds of dollars a month toward your loans, it can be challenging to balance. While federal student loans are still deferred as of May 2022, private loans have already begun repayment or were potentially never even delayed.
Granted, the current loan repayment moratorium is not something you should rely on when picking which loan to take out for school. Loan deferment rarely happens, and paying off loans as quickly as possible is best in most situations.
We know this is a lot of information to process and it can seem overwhelming, especially when we’re talking about so much money at stake. It’s critical to understand all the elements of a student loan before taking them out. It may not seem like a big deal if it’s only a few thousand dollars a year, but they can quickly add up and stay on your credit until paid off. If you have other questions, reach out to your school’s Student Finance office. And don’t forget to protect your hard-earned investment or student loans with tuition insurance!