So you're thinking about going to college and taking out a student loan. Please be careful as the value of a college education is declining due to the internet, free information, and new types of schools that cost less and take a shorter amount of time to attend.
If you have a choice, attend a lower-cost public university instead of paying full-tuition for a private university. With the college admissions scandal and the way society is going, fancy private universities are losing their reputation. Going to a private university is now looking like a luxury only the rich and elite can afford.
Even if you go to a fancy private university, most graduates end up doing the exact same thing as most other non private university graduates. Don't be fooled. The feeling of prestige only really lasts while you're in college, making no money. Don't risk you or your parents reputation trying to bribe your way into an elite private university either.
Chose Your School And Student Loans Carefully
Many graduates will try to prolong their feeling of eliteness by telling people where they went to school every chance they get. But after a couple years of work, nobody cares where you went to college anymore. What your employer cares about is whether you can do a great job at your company. If you are an entrepreneur, what your investors care about is how good you are at growing your business.
There are many different types of Federal Student Loans, also sometimes referred to as government student loans. Federal Student Loans are funded by the U.S. Department of Education and are made available to students who fill out the Free Application for Federal Student Aid form, or FAFSA for short.
Federal student loans don’t require a credit check, proof of income, or a cosigner. You will have to repay the loans with interest. However, federal student loan interest rates are typically lower than even the best private student loan rates.
Types of Federal Student Loans
All new federal student loans are made through the William D. Ford Federal Direct Loan Program. Below are the different types of Federal Student Loans to consider. We'll go from most common to least common, and their various benefits.
Direct Subsidized Loans
- Eligible Students: Undergraduate Students with Financial Need
- Interest Rate for 2020 School Year: 4.53%
- Origination Fee: 1.059%
- Grace Period: 6 months
Direct Subsidized Loans are a type of Stafford Loan and are designed for undergraduate students who have clear financial need as determined by the FAFSA. The subsidization comes where the government pays the accrued interest during periods of deferment while you are in school and often the deferment period after graduation.
With this type of Direct Loan, the school determines the amount of each loan per student based on the cost of tuition and other related expenses. However, the amount provided through a Direct Subsidized Loan cannot exceed the total financial need of each student.
With Direct Subsidized Loans, the government pays the interest on the loans while you are enrolled at least half-time in school. You will then have a student loan grace period to start paying back your loans once you graduate. A typical grace period is six months.
It's a good rule of thumb to always maximize subsidized federal student loans before turning to unsubsidized loans or private loans. Although, it is now always worth checking what the latest rates are for private student loans because it only takes a couple minutes and is free to do.
There are many sites out there that can help you get student loans and pay off your debt faster such as SoFi. Ot of all of them, Credible is my favorite student lending marketplace where pre-vetted lenders compete for your business.
Direct Unsubsidized Loans
- Eligible Students: Undergraduate, Graduate, and Professional Students
- Interest Rate for 2020 School Year: 4.53%% (undergrad), 6.08% (graduate & professional degrees)
- Origination Fee: 1.059%
- Grace Period: 6 months
Direct Unsubsidized Loans differ from subsidized loans in that there is no requirement to show financial need to be eligible, but the government does not pay accrued interest during periods of deferment and while you are in school.
During these periods, interest will continue to accumulate unless you make payments while in school. However, most borrowers do not do this because they don't have the income necessary. Therefore, if you are to borrow money through a Direct Unsubsidized Loan, know that you will graduate with more debt than you started. You also probably can't afford to take a “walk about” and travel the world after graduation. The pressure is on for you to find a job ASAP.
The amount you can borrow stems from the total cost of attendance, minus other financial aid received, up to the federal student loan limits. This amount, however, is still determined by the school you are attending.
Below are the Federal Loan Limits For Dependent students:
- First-year undergraduate students – $5,500, with no more than $3,500 as subsidized loans
- Second-year undergraduate students – $6,500, with no more than $4,500 as subsidized loans
- Third- and fourth-year undergraduate students – $7,500, with no more than $5,500 as subsidized loans
Each of these loan limits for federal student loans is per year. There is also an aggregate loan limit of $31,000 for dependent undergraduate students, with no more than $23,000 as the aggregate limit for subsidized loans.
The Federal Loan Limits For Independent students are:
- First-year undergraduate students – $9,500, with no more than $3,500 in subsidized loans
- Second-year undergraduate students – $10,500, with no more than $4,500 in subsidized loans
- Third- and fourth-year students – $12,500, with no more than $5,500 in subsidized loans
Similar to dependent students, independent students face aggregate student loan limits. Undergraduates may have no more than $57,500 in total federal student loans, with no more than $23,000 in subsidized loans. It is also important to note that all graduate-level students are considered independent students.
Parent PLUS Loans
- Eligible Students: Parents of Dependent Undergraduate Students with No Adverse Credit History
- Interest Rate for 2020 School Year: 7.08%
- Origination Fee: 4.236%
- Grace Period: No Grace Period Typically but Parents May Request Deferment for 6 Months After Child Leaves School
Parent PLUS Loans are a type of PLUS Loan that are specifically for parents of a dependent undergraduate level student who is enrolled at least half-time at an eligible school. The borrower must be the biological or adoptive parent, or stepparent in some cases. Guardians are not eligible.
Parent PLUS Loans differ from other federal student loans in that the government will perform a credit check to make sure there is no adverse credit history, such as a bankruptcy.
Parent PLUS Loans are first paid to the student’s school, with any remaining amount sent to the parent. Payments are typically required shortly after the loan proceeds are received.
A Parent PLUS loan is quite common because it is usually the parent who is paying for their child's education.
Grad PLUS Loans
- Eligible Students: Graduate and Professional Students with No Adverse Credit History
- Interest Rate for 2020 School Year: 7.08%
- Origination Fee: 4.236%
- Grace Period: 6 Months After Leaving School
Graduate students who are attending school at least half-time may qualify for a Grad PLUS Loan. Graduate students must be enrolled in a program that leads to an advanced degree or a professional certificate to qualify.
A credit check is also required for Grad PLUS Loans, and all borrowers must meet the other broad eligibility requirements for receiving financial aid from the Department of Education.
Unlike Parent PLUS Loans, Grad PLUS Loans do not require immediate repayment while in school. Instead, graduate students may defer payments while they are enrolled at least half-time in school for a period of up to six months after graduation or dropping below half-time status.
Grad students should first max out their limits on Direct Unsubsidized Loans before turning to Grad PLUS Loans because of the lower interest rates.
The Grad PLUS loan is mostly taken out by the adult student. At this point, most parents opt not to pay for their child's education any longer. I got my MBA part-time at UC Berkeley and saw many of my classmates take out a Grad PLUS loan. I did not because my company paid for 80% of the tuition.
Consolidation Loans
- Eligible Students: Most Borrowers with Federal Student Loans
- Interest Rate for 2020 School Year: Weighted average of federal loans being consolidated rounded up to the nearest eighth of a percentage
- Fee: None
- Grace Period: 60 Days After the Loan is Disbursed (If any of the loans are in their grace period, you may request to delay repayment until it is up)
Direct Consolidation Loans are for students who already have several federal student loans and want to combine them into one. The reason why you'd want to combine them into one is if the new loan has a LOWER interest rate. You also streamline your repayment into a single amount and make things easier. Your repayment is all on one time schedule.
Consolidating federal student loans does not require a credit check or a cosigner, but it may result in a slightly higher interest rate overall than keeping the loans separate. Therefore, make sure the interest rate is reasonable before going the Direct Consolidation route.
Note that parents with Parent PLUS Loans may not consolidate those loans with their children’s federal student loans.
Note, there used to be the Perkins loan for families in financial need, but that stopped in 2017.
Federal Student Loan Borrowing Limits
Unfortunately or fortunately, you can't borrow an indefinite amount of money as a student or parent of a student. The amount of money you can borrow is limited by year, status of student, status of financials, and type of attendance.
Here are the limits for 2020+ per year:
- First-Year Undergraduate Students – Dependent students can borrow $5,500 with no more than $3,500 in subsidized loans; independent students can borrow $9,500, with no more than $3,500 in subsidized loans.
- Second-Year Undergraduate Students – Dependent students can borrow $6,500, with no more than $4,500 in subsidized loans; independent students can borrow $10,500, with no more than $4,500 in subsidized loans.
- Third-Year and Beyond Undergraduate Students – Dependent students can borrow $7,500, with no more than $5,500 in subsidized loans; independent students can borrow $12,500, with no more than $5,500 in subsidized loans.
- Graduate and Professional Students – $20,500 of unsubsidized only
The aggregate loan limits for dependent students is $31,000 with no more than $23,000 as subsidized. Independent undergraduate students can borrow $57,500, with no more than $23,000 in subsidized loans, while graduate and professional students can borrow $138,500, with no more than $65,500 in subsidized loans.
Let us pray you never reach those limits. If you do, trying to build your net worth will be difficult upon graduation with six-figures in student loan debt that may have accrued interest.
How To Qualify For Federal Student Loans
Here are the basic requirements necessary to qualify for Federal Student Loans:
- Be a U.S. citizen or eligible non-citizen
- Have a valid Social Security number
- Be enrolled or accepted for enrollment as a student with an eligible degree or certificate program, at least half-time
- Maintain academic progress in college
- Show you are qualified to obtain a college degree or career school education
- Are not in default on existing federal student loans
Anyone attending school may apply for federal student loans, and so long as the maximum loan amounts are not yet met and eligibility requirements stay in place, federal student loans are still an option.
Benefits of Federal Student Loans
Federal Student Loans is generally your best option for getting student loans due to relatively lower interest rates, deferment and forbearance protections, a variety of repayment options, and not needing to do a credit check.
However, you should always check out the latest private student loan lending rates to see if you can get a better interest rate. If you need to borrow more money, going the private student lending route is also a good option.
Again, I highly recommend checking out Credible to get highly competitive private student loan quotes from pre-vetted lenders. It's free and you'll get real quotes in about two minutes.
Alternatively, you can always apply for the numerous scholarships and grants (free money) available online. There are more than you know. It's just that too many students just don't bother searching and applying.
You can also consider being a Resident Assistant or participate in a work-study program that helps pay for some of your tuition. Again, I got 80% of my Berkeley MBA paid for because I went part-time and worked full-time. But that took a lot of energy over three years.
Your goal is to graduate from a reputable college with as little student loan debt as possible. The more student loan debt you have, the more you are restricted from moving for a great job opportunity, buying a house, and starting a family. Please choose your college wisely and borrow responsibly. You will eventually have to pay back your debt.