Student Loans Explained

What You Need to Know About Student Loans for College

Most students rely on a variety of funding sources to pay for college. Personal savings and family contributions are one of the first places students turn, but often these resources don’t cover higher- education costs.

Scholarships and grants are windfalls for college funding, because they do not require repayment.  Performance and financial need are considered, and then eligible students are endowed with gifts that pay for tuition, books and housing.  Do not leave free money on the table – apply for every grant and scholarship for which you qualify.

Loans are the most common funding sources for college: According to the National Postsecondary Student Aid Study (NPSAS), 65% of four-year undergraduate students take out student loans to help them pay for college. But unlike some other resources, loans must be paid back.  Loans, and associated interestcosts, typically keep graduates in debt for 10 years or more.

college loans explained

Types of Student Loans

Student loans are funded by a variety of sources including The United States Federal Government and private lenders like banks and credit unions.  Federal loans are the most accessible to students, and offer the best repayment terms.

Private loans, also referred to as personal loans and alternative loans can be difficult for students to secure without cosigners.  Interest rates are higher than federal student loans, but still fall below most other types of private financing (home, car, etc.)

Federal Student Loans

The Federal Family Education Loan program (FFEL) is a now-defunct lending program designed to provide American college students and their families with federally backed student loans. These loans are now made through the U.S. Department of Education’s Direct Loan Program.

These distinct types of loans are available to students and parents seeking Federal Financial Aid:

Stafford Loans

  • Subsidized Stafford Loans are available to students who demonstrate financial need.  Payments are not required while you are enrolled in school, or during grace periods and deferment periods. Interest rates vary, but are currently 3.4%.  Loan limits move on a sliding scale, based on what year you are in college; ranging from $5,500 annually, for first year students to $7,500, for third year students and beyond.
  • Unsubsidized Stafford Loans do not require students to show a particular level of financial need.  Interest accrues on these loans from the moment the funds are issued, and students are given the choice to pay as they go, or add accumulated interest to the total amount owed following school. Loan limits match those of Subsidized Stafford Loans, but interest rates are higher; currently fixed at 6.8%.

To be considered for Stafford Loans and other Federal Student Aid, you must submit a Free Application for Federal Student Aid (FAFSA). Repayment begins six-months after graduation, and is governed by repayment schedules ranging in length from 10 to 25 years.

Perkins Loans
Perkins loans are federally funded loans administered directly by your institution of higher education college loans(IHE).  The loans are extended to students who have the greatest financial need. In general, families with annual incomes below $25,000 are eligible for Perkins Loans.

These three factors determine the size of your Perkins Loan:

  1. When you apply
  2. Your level of financial need
  3. Funding level at your school

The maximum annual loan for undergraduate students is $5500, with a lifetime loan maximum of $27,000.  Graduate students can borrow up to $8000 each year, with a $60,000 lifetime cap.
Perkins Loan repayment starts 9 months following graduation, witha fixed  5% interest rate. 

Direct PLUS Loans
Parents of dependent undergraduatestudents can borrow money under this federal program.  Borrowers must be able to pass a credit check, and the student whose education is being funded must be a dependent that meets these minimum requirements:

  • Under 24 years of age
  • Single
  • No dependents

Parents access PLUS loans by filing an application, and signing a Master Promissory Note (MPN).  Interest rates are fixed at 7.9%, and borrowing limits are determined by subtracting all other financial aid award amounts from the total cost of attending school.

Consolidation Loans
For students holding multiple federal loans, this program facilitates combining them into a single loan.  A single monthly payment replaces the need to pay each loan individually, and the repayment terms of the loan can be extended for up to 30 years. 

Students considering this loan should pay close attention to how their total repayment costs might be affected.  Consolidating and extending the repayment schedule of your loans can add considerable costs to your total obligation.

State Student Loans

State-specific funding varies – some have none, while others have a great deal.  Your FAFSA places you in contention for some state loans, but other programs require separate enrollment.  Your high-school guidance counselor and college financial aid office are equipped to sort out the specifics for your state.

You can also find valuable information on state higher education websites.  In Minnesota, for example, students are eligible for loans, under a program called SELF.

SELF is not subsidized, so worthy credit is required for getting a loan.  Minnesota residents who attend participating colleges are eligible to borrow up to $10,000 each year, at a fixed rate of 7.25%.  Cosigners provide credit reinforcement that enables students with limited credit to apply.

Private Student Loans

Private student loans, such as those offered by Wells Fargo and Chase are designed to bridge the gap between your financial aid package and the true cost of your education. Private loans require borrowersto pass credit checks, and the loans often have higher interest rates than those subsidized by the U.S. Government.

Cosigners who are willing to share responsibility for your loan provide the credit resources you need to get private financing.  Federal Student Loans should be considered first, but used appropriately; private loans can effectively pay for extra educational costs, without creating unmanageable financial burdens.

Private student loans are sometimes called personal loans and alternative student loans.

Institutional Student Loans

Institutional loans are extended by colleges and universities as a means to cover educational costs that remain after other forms of financial aid have been applied.  Long-term and short-term institutional loans are used to pay for books, room and board, and other student expenses.

Institutional loans are by definition campus-specific, so interest rates and repayment terms are determined by each educator.  Your financial aid office is best equipped to outline specific programs offered by your school.

college loan types

Managing Your Student Loans

Apply these responsible financial management principles, as you repay your student loans:

  • Consider the advantages of loan forgiveness programs. These programs are available to students who agree to work in high-need fields like nursing and education. Enrolling in the military often makes you eligible for loan forgiveness. Essentially, you commit to work or serve for a designated period of time, in exchange for complete or partial loan forgiveness.
  • Make student loan payments on time.  In some cases, your interest rate may qualify for reduction after you make a certain number of consecutive on-time payments. If you have a cosigner, he or she may be released from responsibility for the loan, once you have exhibited a required level of consistency with your repayments. Defaulting on your student loans has far-reaching consequences, so it is never an option.
  • Manage your loan repayment schedule using online calculators. If you are considering a consolidation loan, use these tools to quickly determine your total loan repayment obligation.
  • Take advantage of federal education tax incentives, like the student loan interest deduction and Hope Scholarship Credit.

Student Loan Tips:

  • Use student loans to supplement other financial aid awards, like grants and scholarships.  Make sure to start a college savings plan as early as possible. College accounts like the 529 savings plans allow you to save pre-tax money for college.
  • Understand the terms of your federal and private student loans, before you sign on. You will be bound to the conditions of your loans for many years.
  • Don’t miss payments.  Be proactive in protecting your credit, by contacting your lender before you default.  Consolidation loans, deferments and other accommodations are available, to keep your repayment schedule on track.