This blog post was written by Student Advisory Council member, David Gonzalez
Paying for school is can be a challenging and confusing process. You may not have all the money you need upfront to pay your school’s sticker price. However, there are various student loan options at your disposal, and here is a quick breakdown of them.
Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Loans are both considered federal loans. (They are sometimes referred to as Stafford Loans.) To qualify for either, a student must be enrolled at minimum half-time at an educational institution that takes part in the Direct Loan Program, offered by the U.S. Department of Education. This institution must be the same one that will grant the student a certificate or degree at the end of their program. The school will ultimately determine who is eligible for either loan. To apply for these loans, the student needs to apply through the Free Application for Federal Student Aid form, also known as FAFSA.
The Direct Subsidized Loan is offered only to undergraduates who demonstrate financial need. The student may only borrow up to the school’s set limit, meaning that the loan amount may not go above demonstrated financial need. (This may result in a lower loan limit compared to that of an Unsubsidized Loan.) During the student’s time enrolled in school, plus a “grace period,” the U.S. Department of Education pays the interest on the student’s loan. Afterwards, the student is liable for this interest.
On the other hand, Direct Unsubsidized Loans are offered to undergraduates and graduates/professional degree students, regardless of financial need. Just like Subsidized Loans, Unsubsidized Loans are subject to certain limitations, being that of the cost of attendance, considering other financial aid that the student may receive. The student will be responsible for interest payments throughout the life of the loan, including when enrolled in school. Unpaid interest during the time of school enrollment will result in the interest amount being added to the principal, if unpaid.
The interest rates for both loans are fixed for the duration of the loan itself. Currently, the interest rate for undergraduates is 3.73% and 5.28% for graduates/professional degree students. Interest rates and fees change annually, visit Federal Student Aid for most updated information.
Direct PLUS Loan
The PLUS loan is another federal student loan program to consider if a student’s school participates in the Direct Loan Program. It can be granted to eligible parents of a student enrolled in school or to graduate/professional degree students. For this type of loan, the U.S. Department of Education will be the lending party. The PLUS loan often requires a healthy credit score to qualify, but case-by-case determinations can be made in some instances, given that the lendee meet certain criteria. The amount loaned will be limited by the cost of attendance, accounting for aid the student expects to receive.
Currently, the interest rate for PLUS loans is 6.28%, which maintains during the full life of the loan. As you may have noticed, this interest rate is higher than that of (Un)Subsidized Loans. Eligible parents can make payments while the student is enrolled, or they can request payment deferment during the student’s enrolled time, plus a grace period. In the latter case, payments will be made afterwards; however, interest from this deferment period still accrues and can be added to the principal amount if not paid for. Graduate students, though, do not have to make payments until after their grace period. Just like the parent PLUS loan, graduate PLUS loan interest does accrue during the time of non-payment. The interest may also be added to the principal if not paid.
Parents and students can apply online, but some institutions have different processes. Please visit Federal Student Aid for additional PLUS details.
Students often begin their loan search with federal loans. Though these loans are typically cheaper than private ones, they may not cover everyone’s financial needs. Private loans are usually granted by credit unions, banks, and other private institutions. Some borrowers can choose to refinance their federal student loans if they believe they can get a lower interest rate. However, this should be exercised with caution since some private loans are subject to fluctuating interest rates and cannot be forgiven. Federal loans offer the advantage of fixed interest rates and the opportunity for loan forgiveness. Other factors to consider before refinancing federal student loans are listed at Federal Student Aid.
Additional Note: Origination Fees
Federal student loans, as well as some private loans, may charge an “origination fee,” which is the cost of processing the loan. It is calculated as a percentage of the total loan amount and is taken out of each loan disbursement. Consequently, the amount borrowed is more than the amount the student receives.