Student Loan Guide

If you are thinking about going to college, one of the first questions to address is how you will pay for it. As the price of higher education continues to rise, it’s not unusual for students to look for assistance in the form of loans. In fact, according to the American Student Assistance organization, almost 60% college students borrow money each year to help offset the cost of attendance.

As you research your options for financial assistance, it’s important to first understand that most lenders, including the U.S. Department of Education, won’t issue financial aid to students who are not attending schools or programs accredited by a recognized accrediting agency. The Database of Accredited Postsecondary Institutions and Programs is a good place to begin your search for schools that are eligible to receive federal financial aid.

Once you’ve identified programs you are interested in attending, you can address funding. If student loans are part of your plan for college, now is the time to explore all of the potential benefits and challenges. This type of financial assistance can be a great way to start building your personal credit, but if you’re not careful, it can be easy to get in over your head.

This guide provides an overview of federal and private student loans, as well as your rights and responsibilities in the process. Use this information to find out more about what is available and determine if loans are right for you.

I. Federal Loans

Most educational experts agree that federal loans and grants are the best financial aid option for today’s students. Unlike loans from private institutions (such as banks or credit unions), federal loans are offered at a fixed interest rate, and the U.S. government also allows loans to be forgiven or cancelled under certain circumstances. This section will discuss the various financial aid opportunities available through the federal government.

Before we explore the different types of aid, let’s look at the eligibility criteria for anyone who wishes to receive loans from the federal government. Recipients must:

  • Have graduated from high school or received a certificate of equivalency (such as a GED)
  • Be enrolled or have been accepted into a degree or certification program at a regionally or nationally accredited higher-learning institution
  • Be registered with the U.S. Selective Service (males must do so between the ages of 18 and 25)
  • Have a valid Social Security Number (with the exception of individuals from the Marshall Islands, Palau, or the Federated States of Micronesia)
  • Certify in writing on a Free Application for Student Aid (FAFSA) that he or she:
    • is not in default for any federal loans
    • has not been required to pay a refund on a federal grant
    • pledges to use all federal financial aid for educational purposes
  • Maintain good academic standing while receiving federal aid
  • Be registered U.S. citizens or nationals; exceptions to this rule include:
  • Permanent U.S. residents with a Green Card (I-551, I-151, or I-551C)
  • Individuals with a certified I-94 form who have been granted asylum, or are living in the U.S. as refugees, Cuban-Haitian immigrants, conditional entrants, parolees, or battered immigrants
  • Students with T-visas or parents of students with T-1 visas.

Types of Federal Loans

Subsidized and unsubsidized loans are available to U.S. citizens who are seeking a degree from an accredited college or university.

  • Subsidized loans are exclusively available to students who are earning their first undergraduate degree. The U.S. Department of Education will pay the interest on the loan while the student is enrolled at least part-time, and for up to six months after the student graduates. Interest will also be covered if a period of loan deferment or forbearance is issued to the student (see below).
  • Unsubsidized loans are available to both undergraduate and graduate students, regardless of demonstrated financial need. The student’s college or university will determine the loan amount, based on factors like cost of attendance and any other financial aid the student is currently receiving.

Unlike subsidized loans, unsubsidized loan recipients will be required to pay interest on the loan as soon as monies have been received. Recipients who request deferment or forbearance will not be required to make loan payments, but interest will continue to accrue as long as the loan is outstanding. The two most widely used federal loan options are Direct PLUS Loans and Perkins Loans. There are subsidized and unsubsidized versions of each.

  • Direct PLUS Loans are available to either graduate students or the parents of dependent undergraduate students. The loan amount will be calculated by subtracting any other financial aid the borrower has received from the total cost of attendance.
  • All applicants must have a good credit history in order to receive Direct PLUS Loans. When the FAFSA is submitted, a credit check will be performed to determine whether or not the applicant has an adverse credit history. If this is the case, the applicant may still qualify for loans by obtaining an endorser (or co-signer) who has good credit history and is not a parent or guardian of the applicant. Leniency may also be granted to applicants who can provide documented proof of extenuating financial circumstances that have led to their poor credit history.

  • Federal Perkins Loans: Federal Perkins Loans are available to both undergraduate and graduate students who demonstrate “exceptional financial need.” They are offered at an interest rate of 5 %. Unlike Direct PLUS Loans, the student’s college or university (and not the U.S. Department of Education) will act as the lender, and repayment of interest is completed through the school’s loan office. Please note that some schools do not offer Perkins Loans.

The amount of money awarded annually to recipients of these loans will depend on two factors: their educational level and their tax status (dependent or independent).


Dependent Independent
First-year undergraduate $5,500 (up to $3,500 may be subsidized) $9,500 (up to $3,500 may be subsidized)
Second-year undergraduate $6,500 (up to $4,500 may be subsidized) $10,500 (up to $4,500 may be subsidized)
Third-year undergraduate (and higher) $7,500 (up to $5,500 may be subsidized) $12,500 (up to $5,500 may be subsidized)
Graduate N/A (all graduate students must file as independents) $20,500 (all unsubsidized)

Currently, the total loan limit for dependent undergraduate students is $31,000, and the loan limit for independent undergraduate students is $57,500; in either case, no more than $23,000 of the total amount may be subsidized loans.

Historically, the Federal Family Education Loan (FFEL) program involved private lenders providing loans to students on behalf of the federal government; low-interest Federal Stafford Loans were included as part of the FFEL. As of 2010, these two types of aid have been consolidated into the Federal Direct Student Loan program.

Federal: Applying for the FAFSA

Students or parents of students who wish to apply for subsidized or unsubsidized direct loans, PLUS loans, or Federal Perkins Loans must complete and submit a FAFSA. This document is used by both lenders and higher-learning institutions to determine the applicant’s level of financial need.

FAFSA forms can be submitted four different ways:

In order to correctly complete and submit a FAFSA, applicants must follow these steps:

  1. Obtain a FAFSA Personal Identification Number that enables him or her to submit an electronic copy of the application, sign loan agreements, and obtain additional information about federal aid.
  2. Collect the following documents/information to enter on the application
    • Social Security Number (for dependent students, their parents’ SSN will be required)
    • Driver’s license number (if available)
    • Alien Registration Number (for non-U.S. citizens)
    • Federal tax returns (1040, 1040A, 1040EZ); additional information will be required for dependent students, married students, or students from foreign countries
    • Records of untaxed income (such as child support received from a former spouse or veteran noneducation benefits)
    • Bank and credit card account balances; investments such as stocks, bonds, and real estate; and any business or farm assets (for dependent students, their parents’ financial information will be required).

Dependent students may still be able to submit a FAFSA and be considered for federal aid if their parents are unable or unwilling to provide their personal information. Extenuating circumstances include:

  • One or both parents are in prison
  • The student previously vacated his parents’ home due to abuse or neglect
  • The student does not know the present whereabouts of either parent
  • The student is between the ages of 21 and 24, and is considered either homeless or self-supporting

These circumstances will allow the student to submit the application without the required parental information, but the student must report this at the time of submission.

In the event of parents’ refusal to provide required information, the FAFSA will still be processed but the student will not receive an Expected Family Contribution (EFC), which is a number used to classify applicants based on their level of financial need. Some (but not all) U.S. colleges and universities will deem applicants ineligible for aid if they do not present an EFC.

Please review the U.S. Department of Education’s two-minute video FAFSA tutorial for more information. There are other helpful videos on the Federal Student Aid YouTube Channel. Click here for information on FAFSA application deadlines.

Federal: Borrowing and Repayment Periods

So far we’ve discussed the different types of federal loans and the process required to apply for this type of financial aid. The next section will cover the two important phases that occur once the recipient submits a FAFSA and prepares to begin college: the borrowing period and the repayment period.

Beginning in the spring, the applicant will begin to receive award letters from all of the schools listed on his/her FAFSA. These letters will explain how much federal and non-federal aid (loans, as well as grants and scholarships) the applicant is eligible to get while enrolled at that particular institution.

Borrowing

In most cases, the amount of federal aid (combined with any other financial sources listed in the student’s FAFSA) will cover the entire academic year, with payments disbursed once per semester or quarter. If the school abides by a non-traditional schedule, payments will be disbursed at least twice during the academic year. Rather than being given directly to the student, this money will be applied to charges stemming from tuition, course fees, and room and board if the student lives on-campus.

Students should contact their school’s financial aid office for specific information pertaining to that institution.

Any student who is receiving subsidized or unsubsidized loans for the first time will be required to attend entrance counseling, a course or series of courses that kick off at the beginning of the school year (or semester for students who begin attending classes outside the fall). Entrance counseling will explain how financial aid works in terms of obligations and privileges to the borrower and the lender. Graduate students who receive Direct PLUS Loans will also be required to attend entrance counseling.

Repayment Options

As mentioned, federal loans will begin accruing interest as soon as the first payment is disbursed.

  • The fixed interest rate for subsidized and unsubsidized loans is the same for undergraduate students: 3.86%. Graduate students who receive unsubsidized loans will pay interest at a rate of 5.41%. There is an additional 1.072% loan fee for subsidized and unsubsidized loans that have been disbursed since Dec. 1, 2013.
  • The fixed interest rate for Direct PLUS Loans is 6.41%. Additionally, recipients who received or will receive these loans after Dec. 1, 2013, must pay a loan origination fee of 4.288%; this amount is automatically deducted from loan disbursements.
  • The fixed interest rate for Perkins Loans is 5%. There are no additional fees beyond interest.

If the recipient recognizes that some or all of the monies are actually not needed to fund his/her education, the loans may be fully or partially returned within 120 days to avoid incurring interest charges.

In many cases, extenuating circumstances prevent federal aid recipients from making their scheduled payments on time. Unlike private lenders (which offer few relief options), the federal government allows borrowers to request suspension of repayment in certain cases. The two most common instances are deferment and forbearance.

Deferment

Borrowers who receive a deferment will not be required to pay either the principal on their federal loans for as long as the status is in effect. For subsidized Direct Loans and Perkins Loans, the federal government will pay the interest that accrues during the deferment ― but this will not be the case for unsubsidized Direct Loans or Direct PLUS Loans.

To request a deferment, contact the lender who provided the loan (for federal aid, this will either be the U.S. Department of Education or the school). The following individuals may be eligible for a deferment:

  • Students or parents of students who are currently enrolled in at least a part-time college course schedule
  • Graduate students who are enrolled in a fellowship
  • Disabled students taking part in a rehabilitation program
  • Students who cannot or are unable to find employment (for up to three years after graduation)
  • Students whose careers have placed them in a period of “economic hardship” (this includes Peace Corps)
  • Active military personnel or members of the National Guard serving in a war, military operation, or national disaster, or servicemembers who have returned from a deployment in one of these scenarios (for up to 13 months)

Forbearance

Forbearance is a temporary suspension of repayment obligations for borrowers who cannot complete their repayments on time and do not qualify for a deferment. Those approved for a forbearance may have their payment schedule suspended for up to one year; however, interest will continue to accrue for subsidized/unsubsidized Direct Loans and Direct PLUS loans (but not Perkins Loans). Forbearances will fall into one of two categories:

  • Discretionary: If the borrower is facing an illness or an especially difficult period of financial hardship, the lender will determine whether the individual should receive a forbearance.
  • Mandatory: In some cases, the borrower will automatically qualify for a forbearance without a review from the lender. These cases include:
    • The borrower is enrolling in an internship or residency program (medical, dental, etc.)
    • The borrower’s total amount owed per month is more than 20% higher than his/her monthly income.
    • The borrower is serving in one of the following national service programs: AmeriCorps, Senior Corps, the Social Innovation Fund, or the Volunteer Generation Fund
    • The borrower is serving in the National Guard and is currently on active deployment from his/her state’s governor, but is ineligible for a military deferment

During a period of forbearance, interest will continue to accrue on all federal loans. Please note that borrowers who request either a deferment or a forbearance must continue to make monthly payments until their special consideration has been approved by the lender. Not doing so could result in repayment delinquency, which in turn can cause a poor credit rating.

Loan Consolidation

If a deferment or forbearance isn’t possible, then the borrower may consider this third option. Direct Loan Consolidation involves combining all outstanding debts into a singular loan with one monthly payment. The U.S. Department of Education will consolidate a borrower’s federal loans free-of-charge, and this process stands to lower monthly payments by a considerable margin.

However, this option may be less desirable because the consolidated loan will essentially extend the period of repayment (up to 30 years) and increase the amount of interest the borrower will pay. Another consideration is that, by consolidating the loan, the U.S. Department of Education will nullify any benefit agreements pertaining to the original loans. Additionally, loans cannot be returned to their original status once they have been consolidated.

Borrowers who would like to apply for consolidation can do so through two websites: Direct Loan Consolidation and StudentLoans.gov.

Repayment Plans

If deferment, forbearance or consolidation are not needed to repay federal loans, then the borrower will be expected to repay their debt on time, once a month. The federal government offers seven different repayment plans to accommodate borrowers with different financial and professional considerations. Please note that repayment plans for Perkins Loans will vary from school to school.


Payment Plan Qualifying Loans Payment Schedule Bottom Line
Standard Subsidized, Unsubsidized, and PLUS Fixed amount of at least $50 per month for a period of up to 10 years. This plan allows borrowers to pay the least amount of overall interest.
Graduated Subsidized, Unsubsidized, and PLUS Monthly payments will gradually increase every two years for a period of up to 10 years. This plan is more expensive in the long-term than the Standard repayment plan.
Extended Subsidized, Unsubsidized, PLUS (borrower must have at least $30,000 in loan debt) Fixed or graduated payments for a period of up to 25 years. Monthly payments will be lower than Standard plan, but overall principal and interest payments are likely to be higher.
Income-Based Subsidized, Unsubsidized, PLUS, Consolidated Loans that do not include any of the previous three types of loans Monthly payments will be roughly 15% of the the borrower’s discretionary income (which is calculated by subtracting 150% of the state’s poverty guideline from the borrower’s monthly gross income); payments will graduate as income increases for a period of up to 25 years. Monthly payments will be lower than Standard plans but overall cost of repayment will be higher. All debt will be forgiven after the period of 25 years has elapsed, but the borrower may be required to pay income tax on the amount that has been forgiven. A financial hardship is required for this plan.
Pay As You Earn Subsidized, Unsubsidized, PLUS, Consolidated Loans that do not include any of the previous three types of loans Monthly payments will be roughly 10% of the borrower’s discretionary income; payments will graduate as income increases for a period of up to 20 years. Similar in structure to the Income-Based plan. Monthly payments will be lower than Standard plans but overall cost of repayment will be higher. All debt will be forgiven after the period of 20 years has elapsed, but the borrower may be required to pay income tax on the amount that has been forgiven. A financial hardship is required for this plan.
Income-Contingent Subsidized, Unsubsidized, PLUS Payments adjusted annually to accommodate the borrower’s gross income for a period of up to 25 years. Other than the payment schedule, this is identical to the Income-Based plan. Monthly payments will be lower than Standard plans but overall cost of repayment will be higher. All debt will be forgiven after the period of 25 years has elapsed, but the borrower may be required to pay income tax on the amount that has been forgiven. A financial hardship is required for this plan.
Income-Sensitive Subsidized, Unsubsidized, PLUS, Consolidated Loans (Stafford or FFEL only) Monthly payment is adjusted to accommodate borrower’s annual income for a period of up to 10 years. This plan is more expensive in the long-term than the Standard plan. Additionally, the monthly payment as it pertains the the borrower’s income will follow a different formula for each lender.

Loan Forgiveness

In addition to the plans listed above that allow student debt to be forgiven after a predetermined duration, there are other circumstances that could lead to federal loan forgiveness.

This concludes our section about the terms and conditions of federal loan programs. Next, we will discuss financial aid opportunities from private lenders.

II. Private Loans

Once you receive your federal loan offer, you might discover that your aid package won’t cover all of your student expenses for the school year. As mentioned earlier, there are annual borrowing limits on federal loans based on your status as a dependent or independent student. At this point, you might turn to a private lender to cover the rest of your school costs You might also consider private loans if you do not qualify for federal aid.

You must examine a private loan contract with extreme care, since they differ dramatically from federal loans. Private loans can lead to major financial pitfalls for student who aren’t prepared for the higher variable interest rates, lack of consolidation options, interest charges, lack of deferment options, or prepayment penalty fees. At the same time, private loans can be the deciding factor in whether you’ll be able to attend the next year of college – you just need to look at the options with a high level of scrutiny, so that you don’t get into financial trouble later.

Types of Private Loans

Private lenders, such as banks and corporations, offer commercial student loans and personal loans. Commercial student loans are provided to students or family members specifically for academic use, with repayment terms that are generally tailored to a student’s schedule.

Personal loans, also known as unsecured loans, can be used for miscellaneous college expenses, such as paying for supplies, housing needs, and technology. Personal loans tend to come with steeper interest rates, no grace periods, and repayments generally start a month after funds are dispersed.

Commercial Student Loans

  • SallieMae Private Student Loans: These loan options cover 100% of your school-certified expenses. A single loan minimum is $1,000 and the maximum borrowing amount is $99,999. In order to determine your eligibility, SallieMae will examine your credit history, references, academic history, and financial aid received. A cosigner may also include their information on this application, to increase your chances of qualifying.
    • Fixed rate: 5.74%-11.85%
    • Variable rate: 2.25%-9.37%
  • Discover Undergraduate Loans: Discover will cover the entire cost of college attendance after your financial aid package has been applied, with a minimum of $1,000 per loan. To qualify, you must provide Discover with your proof of enrollment, go through a credit check, and show proof of U.S. citizenship. Like the SallieMae loans, you can also apply with a cosigner to increase your chances of eligibility. Payments are deferred until six months after you finish school, with a repay period of 15 years.
    • Fixed rate: 6.74%-10.99%
    • Variable rate: 3.25%-8.25%
  • Wells Fargo Student Loan for Parents: This loan is meant to be taken out by students’ family members, which can improve your household’s chances of qualifying for a loan. Wells Fargo offers up to $25,000 per year with a maximum total borrowing limit of $100,000. The applying family member must provide your academic information, their own total income, and your residency status. Applicants can choose to defer repayments by 48 months or repay immediately. The total repayment period is 15 years.
    • Fixed rate: 6.74%-13.49%
    • Variable rate: 3.75%-10.24%

Personal (Unsecured) Loans

  • Wells Fargo Personal Loan: This loan allows you to access funds up front within just one business day approval, making this loan type ideal if you must pay outstanding school costs in a short timeframe. You can apply to borrow $3,000 to $100,000 from Wells Fargo. To apply, you must provide Wells Fargo with your income information, employment details, and submit to a credit check. Keep in mind that repayment term for this loan is only 1-5 years – much shorter than commercial student loans.
    • Undisclosed. The fixed and variable interest rates of this loan depend on personal credit history.
  • SchoolsFirst Federal Credit Union: You can borrow a maximum of $50,000 from SchoolsFirst. To apply, you must fill out an academic self-certification form, detailing your college expenses and your estimated financial aid contribution. You will also need to provide your income and employment information, and then submit to a credit check. You must completely repay this loan within 24 to 60 months, depending on the terms you choose.
    • Fixed rate: 8.25%-18%
  • PNC Personal Installment Loan: This financial services company offers a loan that lets you borrow an amount between $1,000 and $25,000. In order to apply, you must provide your income and employment information. Repayment terms and timeframe also depend on the results of your credit check.
    • Undisclosed. The fixed and variable interest rates of this loan depend on personal credit history.

Private: Borrowing and Repayment

Once you apply and get approved for a private loan, you will want to examine the details of the contract very carefully before accepting it. This next section will cover your rights and responsibilities as your accept a private loan, receive funds, apply loans to academic expenses, and accrue interest.

Borrowing Period

The federal Truth in Lending Act requires that private lenders inform student loan applicants of lower-cost or free federal financial aid. Before you are able to accept a private loan, you will need to fill out a self-certification form, which acknowledges that you are aware of these lower cost options. From there, you can begin your borrowing period.

  • Disbursement: Commercial student loan lenders pay funds directly to your school, to cover costs like tuition, student fees, and campus housing. Generally, you can only use commercial student loans for academic expenses that your college is billing you for – not for outside school costs, such as supplies and off-campus housing. This is where personal loans come in – they can be used for a variety of expenses. Personal loans are distributed directly to you, so that you can manage miscellaneous academic costs.
  • Interest Accruement: Private loans generally accrue interest daily from the moment it is disbursed. Unlike federal subsidized loans, you are responsible for all payments of private loan interest. Before you commit to a commercial student loan, make sure that you inquire about the interest capitalization. This is the frequency that a lender adds your unpaid interest to the total balance of your debt, which raises your subsequent interest payments.
  • Loan Cancellation: When it comes to cancelling a commercial student loan, Title X of the Private Student Loan Transparency Act of 2008 states that students have the right to cancel their student loan within days of accepting the offer. If you have borrowed funds from a personal loan, you will need to examine the cancellation terms and conditions of the specific lender, since these funds are meant to be used for miscellaneous expenses.

NOTE: Keep in mind that accepting a private education loan can reduce your need-based federal aid eligibility, especially if the private loan exceeds the total cost of your annual school expenses.

Repayment Period

Private loan repayment structures will vary from borrower to borrower and even loan to loan. But while private lenders tend to be less forgiving to borrowers who can’t keep up with repayment schedules, there are options to appeal and reduce the credit damage and long term costs of defaulting on a loan.

If you are not ready to begin repayment on the date agreed upon in the contract, don’t wait until the bill comes due to notify your lender. Before you skip a single payment, call the lender to see what your deferral and forbearance options are. Unlike federal loans, you do not get to enjoy a delinquency period before going into default.

  • Grace periods: Payment free periods on commercial student loans can vary depending on the lender and your chosen loan type. Generally, banks and other private lenders give you options such as starting payments immediately, deferring until you finish school, or deferring until you’ve been out of school for a few months. Personal loans typically have no grace periods, and must be paid a month after disbursement.
  • Deferrals and Forbearance: Unfortunately, private loans are not as forgiving on your finances as federal student loans, especially if you’re struggling to make your payments after graduation. Many private lenders will only grant deferrals if you enroll in school again, serve in a medical residency, become unemployed, or get deployed with the military. You will still be expected to pay the full monthly payment on time, or face steep late fees. Some private lenders have forbearance options – but you should only apply to this as a last resort. You must keep making payments until your lender approves your forbearance. While in forbearance, you will continue to accrue interest on your loan, which will then be capitalized into the total balance, raising your subsequent interest payments.
  • Interest Accrual: Depending on your lender, this can happen before repayments, after an event (such as deferrals), or regularly throughout the year. Every time interest is capitalized, your total balance goes up, which is then subject to the fixed and variable rates within the terms of your private loan. This gives you a strong incentive to pay as much as possible throughout the year, reducing your balance, and decreasing future interest payments.
  • Filing Bankruptcy: If your debt gets out of control, and you are completely unable to keep up, you might decide to file for bankruptcy. There have been cases of some private loans being discharged upon declaring bankruptcy, if you are able to demonstrate significant financial hardship in court. However, there is no guarantee that your private debt will be expunged after bankruptcy – it will depend on a number of factors, including your medical expenses, household income, dependents, and previous good-faith efforts to repay the debt.
  • Consolidation and Refinancing: Unfortunately, private loan consolidation programs are extremely limited, since private loans do not qualify for Direct Loan Consolidation like federal student loans. Be sure to examine the repayment terms and interest rates for any consolidation loan you use, to make sure that it will actually make your payments more manageable.

Private: Borrower Rights and Responsibilities

The National Consumer Law Center estimates that over 850,000 private student loans are in default. Defaulting on your private loans can lead to some very serious financial and legal consequences. If you do not turn in your monthly payments, lenders will contact a collection agency to recover the debt. The Fair Debt Collection Practices Act does grant you certain protections from debt collectors, who are expected to adhere to very specific conduct requirements, such as identifying themselves and providing debt verification.

Bottom line: defaulted loans will bring down your credit score. The lender may also take you to court to pursue wage garnishment, which removes a portion of your employment wages to pay off debt.

While private lenders can quickly cover the funds you need to attend college, it is still highly recommended that you scrutinize all of the funding options, including scholarships, federal loans, and grants. You can easily get in over your head. Private loans should be considered a last resort, once you have applied your financial aid and available income to your expenses. Never take out a private loan on more than you actually need.