A Guide for Families
For many families, student loans are part of the college funding equation. With the rising cost of tuition, even students receiving substantial financial aid often need to borrow to cover the gap.
Loans help cover the gap between what a college offers in grants and scholarships and the full cost of attendance. With the astronomical cost of higher education, many students rely on loans to make college possible.
As a college financial aid advisor for over 15 years, I have helped countless families navigate the loan process. Understanding how student loans work can make the financial aid process much less intimidating.
Below is a simple guide to the most common types of student loans available to families.
Federal Student Loans
Most students will see Federal Direct Loans listed on their financial aid award letter. These loans are part of what colleges call “self-help aid”, meaning they must be repaid after graduation, including interest.
Students must submit the FAFSA (Free Application for Federal Student Aid) each year in order to qualify for federal loans.
Federal Direct Loans
Federal Direct Loans are typically the first loans offered to undergraduate students.
Here are the key things families should know.
Fixed Interest Rates
Federal Direct Loans have fixed interest rates set each year in May by the federal government.
Subsidized vs. Unsubsidized Loans
Federal Direct Loans may include two types of loans:
Subsidized Loans
- The government pays the interest while the student is enrolled at least half-time in college.
- Eligibility is based on financial need.
Unsubsidized Loans
- Interest begins accruing as soon as the loan is disbursed.
- These loans are available to all students regardless of financial need.
Many students receive a combination of both.
Federal Direct Loans Are in the Student’s Name
Another important feature is that Federal Direct Loans do not require a co-signer. The loan belongs solely to the student and can be a good way for students to build credit.
Loans Are Disbursed Per Semester
Loan amounts listed on the financial aid award letter are annual, but they are typically disbursed in two installments.
For example:
A $5,500 loan would be disbursed as:
- $2,750 for the fall semester
- $2,750 for the spring semester
These funds are applied directly to the student’s college bill.
Federal Direct Loan Limits for Undergraduate Students
Federal student loans are offered in limited amounts each year.
Dependent Undergraduate Students
Freshman Year
- $5,500 total
- Up to $3,500 may be subsidized
- $2,000 is unsubsidized
Sophomore Year
- $6,500 total
- Up to $4,500 may be subsidized
- $2,000 is unsubsidized
Junior and Senior Years
- $7,500 per year
- Up to $5,500 may be subsidized
- $2,000 is unsubsidized
Independent Undergraduate Students
Independent students receive the same base loan amounts plus an additional $4,000 in unsubsidized loans annually.
Graduate Students
Graduate students can borrow:
- $20,500 per year for graduate programs, with a lifetime limit of up to $100,000.
- $50,000 for professional students, with a lifetime limit of up to $200,000.
Graduate Direct Loans are all unsubsidized.
Accepting or Declining Federal Student Loans
Students are not required to accept federal loans.
They can:
- Accept the full loan
- Accept only the subsidized portion
- Decline the loan entirely
Students can also choose to borrow for one year and decline loans in another year. Continued…
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