What are Student Loans and how is Eligibility Determined?
In general, student loans are loans used to pay for college. It’s important to understand though that there are options and they are very different.
Federal Direct Student Loans
Federal Direct Student Loans are funded by the federal government and made available to students who are eligible to receive federal financial aid. There is no credit evaluation for these loans. To access the loans, you must fill out the Free Application for Federal Student Aid (FAFSA).
There is a maximum you can receive per year depending on your class year and dependency status:
|Year in School||Dependent||Independent|
|First-Year Undergraduate Annual Loan Limit||$5,500||$9,500|
|Second-Year Undergraduate Annual Loan Limit||$6,500||$10,500|
|Third-Year and Beyond Undergraduate Annual Loan Limit||$7,500||$12,500|
You are capped at an aggregate total of $31,000 as a dependent student, unless your parent(s) are denied for a Parent Plus loan. A Parent Plus loan is a loan parents can apply for through the federal government to help cover the cost of student’s education. A parent plus loan is based on a credit evaluation. If the parent is denied, a student is considered an independent student and is eligible for independent student loan limits with an aggregate total of $57,500. Learn more about the difference between a dependent student and an independent student?
Subsidized Verses Unsubsidized Loans
If the information you provide on the FAFSA determines you have “need” as defined by the federal government, you will be eligible to receive some of your annual loan eligibity as subsidized. That means the interest charges will be paid by the government for you while you are in school. The remaining loan amount will be unsubsidized and the interest will accrue while you are in school.
Private loans are loans funded by banks, credit unions, state agencies or even schools. You will need to fill out the specific lender’s application and each will have different requirements. Most will be credit based, particularly banks and credit unions. No financial institution will provide a loan to a dependent student without credit, so you will have to have a co-signer. The amount you can apply for is variable up to the cost of attendance of the school you are attending. These loans will not be subsidized (no one will pay the interest for you while you’re in school). And the interest depends on your and/or your co-signer’s credit.
The key differences in Federal Direct Loans and Private Loans are the terms:
- Amount borrowed
- Interest rates (variable, set, credit based or not)
- Payback periods (number of years)
- Prepayment penalties
- Tax deductibility of the interest
- Ability to defer repayments
- Income based repayment options
- Loan forgiveness
- Ability to discharge on death of student
Students take out private loans when they are not eligible for Federal Direct Student Loans or when the amount they are eligible for under the Direct Loan program does not provide enough funding to pay for school. Understanding how much debt is “reasonable” or whether taking on debt to go to school is a good idea and is a topic for another day. Before you ask those questions you have to know what loans are. Stay tuned for more thoughts on the topics related to student debt.