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Whether you are an aspiring college or grad school student, or the parent of one, understanding the ins and outs of student loans is critical as you consider how to fund the cost of higher education.
As their name implies, student loans are designed specifically for education funding. There are two broad categories of college loans: subsidized and unsubsidized. Please keep in mind that if you’re offered an aid package by a college that includes loans, you need to consider whether repaying those loans will create an excessive financial strain for you or your family, depending on who will do the borrowing.
Subsidized loans: For those with financial need
Families who can demonstrate financial need may be eligible for subsidized student loans, which typically offer a lower interest rate than other college loans. The FAFSA (Free Application for Federal Student Aid) form is used to assess need; and that application may also help you qualify for other types of financial aid, such as grants and on-campus student work. (Some colleges and universities may require a student to submit a CSS profile, which is an online application used by colleges and scholarship programs to award non-federal institutional aid.)
If you’ve been awarded a subsidized loan, be sure to consider accepting it, as it can offer more benefits: Students don’t have to make principal payments until they leave school, and the government pays the interest while students are in college, offsetting some of the cost.
- Subsidized Stafford loans. These government-sponsored loans charge a relatively low interest rate. Qualified students can borrow up to $3,500 their freshman year in subsidized loans. That limit increases as they go through school.
- Financial aid resources. Visit finaid.org for essential savings calculators and valuable info on the FAFSA, subsidized loans and more.
Unsubsidized loans: Available to all students
If you need help paying for college and your family doesn’t qualify for subsidized loans, here are some valuable alternatives.
- Unsubsidized Stafford loans. These loans are also government sponsored, but borrowers incur interest charges during their time at school. Those interest charges may be added to the principal owed, although that will increase the loan’s total cost. Undergrads can borrow up to $5,500 for their freshman year, minus a subsidized Stafford loan. The loan limit increases each year that a student is in school, though you don’t have to borrow the full amount.
- PLUS loans. These federal loans are obtained by a parent, guardian, or grad student, and entail a credit check. If parents qualify, they can borrow the full cost of college minus any federal aid — and the interest may be tax-deductible.
- Private student loans. A number of institutions offer private loans to students and parents. Colleges, for example, may offer loan products, and the interest rates may be lower than those on federal loan programs. Private organizations and foundations also offer private student loans with favorable terms. Ways to qualify include living in a particular state; having a religious or ethnic affiliation; or being the child of an active or retired member of the military.