There are different types of undergraduate student loans to help pay for college
- The single best loan an undergraduate can borrow is the federal Direct Loan, and it’s not just for students with financial need. Any student, regardless of need, can borrow up to the maximum: $5,500 as a freshman, $6,500 as a sophomore, $7,500 as a junior, and $7,500 as a senior.
- Most students receiving financial aid will see two federal Direct Loans in their award letter. One will be a Direct Subsidized Loan, which will total $3,500 for a freshman. The federal government pays the interest while the student is in college. The other is a Direct Unsubsidized Loan, which for a freshman will be $2,000. Interest accrues from the date of disbursal on unsubsidized loans. Both loans have the same low fee and low interest rate. Even though repayment on these loans doesn’t begin until six months after graduation, I highly recommend paying off the unsubsidized loan interest monthly so the amount owed doesn’t balloon.
- Any student not qualifying for financial aid is entitled to borrow up to the maximum in Direct Unsubsidized Loans, which for a freshman would be $5,500.
- Because of the outbreak, monthly repayments on current federal student loans have been automatically suspended between March 13, 2020 and September 30, 2020. The interest rate during that period has been set to 0 percent, so no interest will accrue. If you have made a payment after March 13, you can request a refund, or you can continue making payments if you choose. During this period, your entire payment will go towards principle once all interest accrued prior to March 13 has been paid.
- The interest rate on federal Direct Loans disbursed between July 1, 2019 and March 13, 2020 was 4.53 percent. Interest rates are set annually by Congress in late May or early June and are based on the yield of the 10-year Treasury note. There is every indication that the interest rate for loans that will be disbursed this coming school year between July 1, 2020 and June 30, 2021 will hit historic lows, possibly 3 percent or lower, making borrowing significantly less expensive for families.
- To begin the process of applying for financial aid and federal loans, the student must submit the FAFSA (Free Application for Federal Student Aid). The FAFSA becomes available on October 1 of the student’s senior year. The form is completed online, and submitted once to the Department of Education, who processes it and distributes it to each school the student has listed on the form. Institutional financial aid deadlines vary—some may be as early as November 1 of the student’s senior year. So it is crucial that the FAFSA is submitted prior the earliest deadline.
- If a student’s family has decided not to apply for financial aid but wants to borrow Direct Unsubsidized Loans, the FAFSA must still be submitted. In this case I recommend not submitting the form until after the family has deposited at the college of their choice by May 1 or June 1. After that, they should contact the financial aid office of the college letting them know their plans to submit the FAFSA for the purpose of borrowing federal student loans.
- What if a family needs to borrow more than the annual limit of federal Direct Loans? Parents can borrow federal Parent PLUS loans, which have a higher interest rate and fee than student Direct Loans. The interest rate on these loans disbursed on or after July 1, 2020 will also be set in late May, and should be significantly less that the 7.08 percent current rate.
- Are there private sources of student loans? Yes, many banks, credit unions, and lending institutions offer education and personal loans. They are never as competitive as federal student loans, but may have better terms than federal Parent PLUS loans. It’s important to shop carefully, but not until after the federal loan rates are set in late May or early June.
- Carefully consider how much debt you and your teen can take on. If a student borrows the maximum amount in federal student loans and interest is paid monthly while she is in college, she will graduate after four years with student loan debt of $27,000. Her monthly repayments will be manageable even if her first job after college pays as little as $30,000 a year. But parents approaching retirement with not many earning years ahead of them need to think carefully about how much debt is reasonable, and how much is too much, before making this important decision.
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Jeff Levy, CEP, is an educational consultant based in Santa Monica, California. He works with students locally, regionally, and internationally on their college search and application process, and with parents on college affordability and financial aid. He can be reached through his website.