Do I need a student loan? How do I get one, and how much can I borrow? This post will walk you through the basics about student loans to help pay for your college costs so that you can make informed decisions about smart borrowing.
As a new college student there are instances where you might not be eligible for any grants or scholarships, or where you are eligible for grants or scholarships, but it just isn’t enough financial aid to pay for your tuition, fees, room, and board. If this sounds like you, or you are worried it might sound like your situation because you think your family makes too much money to qualify for grants, student loans would be your next option up for review. Keep reading to find out more about student loans.
Federal Student Loans
To qualify for federal student loans, you must have completed a FAFSA . Federal loans are offered by the US Department of Education under the Federal Direct Loan program.
Direct Subsidized Loans are loans available to undergraduate students who demonstrate financial need and are able to be applied to your educational costs at your school, including tuition, fees, room, and board charges. While you are enrolled at least half time in school (generally six credits or more), the government will pay the interest on this student loan for you.
Direct Unsubsidized Loans are loans available to undergraduate students, but a demonstration of financial need is not required. In this type of loan, you are responsible for all interest accrued.
Direct PLUS Loans are those loans available to parents of dependent undergraduate students. While financial need is not a factor, your parent will be subject to a credit check to determine eligibility.
How Much Can I Borrow?
The maximum amount you can borrow in Direct Subsidized and Unsubsidized Loans ranges from $5,500 to $12,500 per school year. This is also dependent whether you are a freshman, sophomore, junior, or senior, and if you are a dependent or independent student.
For the Direct PLUS Loan, parents can borrow up to the remainder of outstanding charges from the school that are not covered by other sources of financial aid.
Interest rates on loans made under the Direct Loan Program are fixed. However, interest rates will reset annually, as they are tied to certain federal rates. This means that the rate in your first year of college may be different than the rate on your next years of college. For the most up to date interest rate information, check studentaid.gov.
How Do I Get a Student Loan?
As a borrower of federal student loans, you will be responsible for three items: a Master Promissory Note, Entrance Counseling, and Exit Counseling. Your school will assist you with the timing and completion of these items to ensure that your loans are available to you on time and without delay.
A Master Promissory Note (MPN) is the required legal document that borrowers are required to complete which promises the repayment of your student loan, including fees and any accrued interest back to the government. This document also provides you with your rights, responsibilities, terms, and conditions associated with your loans. There is an MPN for the unsubsidized loan, and a separate MPN for the Graduate PLUS loan.
Entrance Counseling provides both your rights and responsibilities as a federal loan borrower, as well as a review of the obligations associated with borrowing the loan(s). The areas of counseling include estimating your cost of education, how much you may expect to borrow, preparing for repayment, and what happens if you do not repay your federal loans.
Exit Counseling is required to be completed when you leave school, graduate, or fall below a half-time enrollment status. This form of counseling acts as an affirmation to your obligations provided under the MPN.
Your Financial Aid Office will notify you how to complete these steps when they are due.
Thinking About Repayment and Future Considerations
In general, students are defaulted into a standard repayment plan, which begins six months after you attend less than half time, withdraw, or graduate from school. This six-month window is also known as your grace period. The standard repayment plan requires your loans to be repaid monthly over a ten-year period. However, there are multiple repayment plans available for federal loan borrowers. For a list of all available options, check studentaid.gov.
Keep in mind that you are required to complete a FAFSA for each year that you are attending college. This means that if you are planning on attending a four-year institution, you will have to do the FAFSA four times. This also means that you might have multiple student loans for each year. The US Department of Education has something available called a Direct Consolidation Loan, which provides for you to combine all your student loans into one larger loan, with a favorable interest rate. Something to think about in the longer term.
There are also loan calculators available for you to simulate what your overall repayment will look like when you graduate from college. Two good sources come from the US Department of Education and FinAid.org.
Private Student Loans
One alternative source to federal student loans come in the form of private student loans. These loans are available for those students who cannot or choose to not borrow from either of these federally provided loan programs. These types of loans are provided by banks or credit unions, and often provide a means to fill the gap between what you have been awarded in financial aid and any remaining costs. These loans are credit-based and carry variable interest rates typically tied to the rate of treasury bills and are dependent on the lender and your credit history. This means that these types of loans can be more costly than federal student loans. Your school may provide a listing of private lenders to assist you with your financing needs. It is best to contact your Financial Aid Office for assistance with private loan questions about interest rates and repayment terms.
Student loans are a lot to digest, especially because the topic continues to dominate the news. As a new college student, it’s hard to think about what repayment will look like when you finish school. If you have questions about student loans and the options available to you, always reach out to your Financial Aid Office!