Student loan debt has been on the rise for some time; during the recession, student loan debt was the only type of debt that increased.1 And according to the Institute for College Access and Success, the average student loan debt in 2012 was $29,400—a 25% increase in just four years.2 You may also remember the new legislation that was passed in August 2013 that affected student loan interest rates.
Student loans, when used wisely, can be a great way to pay for college. But taking on excessive student loan debt will affect your financial future, so you need to be careful and only take out loans that you need.
Students have 5 loan options:
The Perkins Loan is a highly attractive student loan, made available through colleges. These loan resources are limited, and colleges typically offer them to the neediest families.
Eligibility for this loan is determined by the Estimated Family Contribution (or EFC) number from the FAFSA. No interest accrues on the loan while the student is in college—the interest, at 5%, starts to accrue 9 months after graduation. The standard repayment program for the Perkins loan is 10 years.
The subsidized direct loan is a student loan, not a parent loan, and it is written in the student’s name. Parents have no legal responsibility to repay the loan; the student signs the promissory note.
The maximum eligibility for the subsidized direct loan for dependent students is $3,500 in freshman year, $4,500 in sophomore year, and $5,500 in each of junior and senior years. The current interest rate on the subsidized direct loan is 3.86%, with a cap at 8.25%.
To be eligible, the family must have an unmet need. If this unmet need is equal to or greater than $3,500, the maximum can be obtained. Need is defined as (Cost of Attendance) – (EFC from the FAFSA) = Need. Unmet need exists when combined grants, scholarships, and work study programs do not fully meet the student’s financial need.
The unsubsidized direct loan ensures that all students, regardless of their families’ income and assets, will be able to borrow money to pay for college.
The maximum amount of the subsidized and unsubsidized loans together equals $5,500 in freshman year, $6,500 in sophomore year, and $7,500 in each of junior and senior years. If the student is not eligible for any portion of their loan to be subsidized, then all of it—up to the maximums noted—would be unsubsidized. If the student qualifies for the maximum amounts of both kinds of loans, then only $2,000 of their total direct loan package would be unsubsidized.
Interest on an unsubsidized direct loan accrues immediately at a 3.86% rate. Subsidized and unsubsidized direct loans have several repayment options, but the standard repayment option begins 6 months after graduation and lasts for 10 years.
This is not a federal loan program. These loans are designed by private lenders and allow students to borrow money and postpone repayment until after graduation. Although these are generally student loans, they typically demand a cosigner. If the parent is the cosigner, they become legally obligated to repay the loan if the student is unable or unwilling to do so after graduation.
Because these are private student loans, families need to research interest rates and make sure this is the right option.
Colleges that offer their own college loans are rare. The terms of such loans vary and are dependent upon the particular college.
About the Author
Frank Palmasani has helped families work through the college financial aid system for more than 30 years. He is committed to helping all families create a plan for finding the right colleges, without taking on mountains of debt.
1. “The Causes and Consequences of Increasing Student Debt.” Joint Economic Committee, United States Congress. June 2013.
2. “Student Debt and the Class of 2012.” The Institute for College Access & Success. December 2013.