A-B-C, Loans for Me

So you've decided that your ticket to success is a college or graduate school degree. Good for you! You’ve also determined that you’ll need student loans in order to fund it. Before rushing into anything, take the time to familiarize yourself with all of the options available to you so that you make the best decision for your financial wellbeing.

I’ve determined that I need to get a student loan based on financial need….what do I do?

First of all, fill out your FAFSA as soon after January 1 as possible.  FAFSA stands for Free Application for Federal Student Aid. Basically, it’s how the federal government and individual colleges assess how and what funds are distributed to you, the prospective student.  It’s a crucial component of the loan application process.

Some of the financial data required by FAFSA comes from your (or your parent’s) federal income tax return. However, it’s ok (and probably better) to estimate those amounts instead of waiting for the tax returns to be finalized. Getting the FAFSA forms submitted as early as possible improves your chances of success.

What’s the difference between need-based aid and merit-based aid?

Need aid is based on what you can afford; merit aid is based on what you can do. The other key difference is:

  • Need-based packages are sourced from the federal government and individual colleges
  • Merit-based packages are available from individual colleges and universities; private and public companies; and associations and foundations

How is need-based aid determined?

It’s complicated. Basically, your income and assets are analyzed via two fancy-pants formulas:

  1. Federal methodology, used in the FAFSA

and,

  1. Institutional methodology used in the PROFILE (or a college's own application)

The result is your expected family contribution, or EFC: what you’ll pay if you’re eligible for aid. The difference between the total estimated cost of attending the college and your EFC, determines the amount of the aid available.

What kind of need-based aid is out there?

It depends on the institution. In terms of federal aid, there are four types of loans, each with its own set of distinctions.

1. Unsubsidized Stafford Loan

  • Available to undergraduate and graduate students enrolled half-time or more
  • Fixed interest rates (effective 7/1/13 through 6/30/14)
    • Undergrad students:  3.86%
    • Grad/Professional students:  5.41%
  • Re-payment deferred until 6 months after graduation or loss of student eligibility.  Interest charges during the deferral period accumulate and are added to the loan amount as part of the principal.
  • Loan limits? Yes. There is an annual limit and an aggregate limit and the amounts vary depending on whether your parents qualify for a PLUS loan.

2. Subsidized Stafford Loan

  • Available to undergraduate and graduate students enrolled half-time or more
  • Fixed interest rates (effective 7/1/13 through 6/30/14)
    • Undergrad students:  3.86%
    • Grad/Professional students:  5.41%
  • Re-payment deferred until 6 months after graduation or loss of student eligibility.  Interest charges on the loan during the deferral period are paid for by the federal government.
  • Loan limits? Yes. There is an annual limit and an aggregate limit and the amounts vary depending on your year of school (freshman, sophomore, etc.) and on whether your parents qualify for a PLUS loan.

3. Perkins Loan

  • A low interest rate subsidized loan for students (undergrad, grad and professional) with exceptional need.
  • Available to students enrolled for any number of credits.
  • 5% interest rate.
  • Re-payment deferred until 9 months after graduation or loss of eligibility. 
  • Loan limits? Yes. The loan amounts vary depending on your financial need. For undergraduate students the maximums are $5,500 per year and $27,500 total. For graduate students, the maximums are $8,000 per year and $60,000 total.

4. PLUS Loan

  • A federal loan for borrowers with a good credit history.
  • Available to parents and graduate students.
  • 6.4% interest rate.
  • Re-payment can be deferred until after graduation or loss of eligibility but interest charges accrue during the deferral period and are added to the loan amount.
  • Loan limits? No. A PLUS loan can be used to pay for the entire cost of education, minus other financial aid. 

What about loans from private sources such as banks?

If you don’t qualify for federal loans or need to borrow more than the federal loan limits, look into private loans from commercial lenders.  Make sure to understand the interest rate (fixed or variable) and the re-payment terms and options (if any). 

Tax Breaks

Be sure you take advantage of all tax breaks associated with paying for college. For example, the interest portion of your loan re-payments may be able to be deducted up to $2,500 per year.  Also, there are several available during school…for example, you (or your parents) could also qualify for the American Opportunity Credit (HOPE Credit) or the Lifetime Learning Credit.

Now that, let’s take a look at managing the re-payment of student loans and alternative financing opportunities.