Loans 101

Making smart choices and minimizing student debt

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By: Erica Shafer
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Post-graduation dreams don't usually include moving back in with your parents. Unfortunately, this is a reality for thousands of undergraduates with student debt. Here’s some crucial information about the different kinds of student loans that can help you make smart choices and (hopefully) keep you out of mom & dad's basement.

Federal Direct loans

Federal Direct loans are offered to students by the Department of Education. Since they aren't credit-based, the only qualification is at least half-time enrollment at an accredited university. Depending on your dependency status and class standing, you're eligible for varying amounts of money per year. Interest on Direct loans is fixed; however, the fixed rate can change from year to year.

Based on your Expected Family Contribution (EFC) and unmet need, you may qualify to have some of your Direct loan money subsidized by the federal government. No student qualifies to have 100% of their Direct loan subsidized, so if you can afford to make payments on the unsubsidized parts while in school, you should. Otherwise, the unpaid interest will be added on to your principle amount when the loan goes into repayment (six months after you stop attending school at least half-time).

Federal Perkins loans

Although the Federal Perkins loan is a federally-funded program, students typically repay their school instead of the feds. Since universities themselves are the lenders, they are allowed to make up some of the rules about who will qualify for it.

Like the Direct subsidized loan, a Federal Perkins loan is not credit-based, requires at least half-time enrollment, and has a fixed interest rate that is subsidized. The max a student can receive each year is $5500; however, many schools adjust their awarding amount in order to spread the Perkins loan love to more students. Unlike Federal Direct loans, Perkins loans have a longer (nine-month) grace period before repayment is required after you aren't in school (at least half-time) anymore.

Federal Parent Plus loans for undergraduate students

Parent Plus loans are credit-based loans that parents of a dependent student can borrow through the Department of Education. Parent Plus loans are not need-based and the amount a family can borrow is only limited by their university's cost of attendance and the amount of aid a student has already accepted.

Like other federal loans, Parent Plus loans have a fixed interest rate (though it tends to be higher than Direct and Perkins loans). A Parent Plus loan begins repayment 60 days after the last disbursement of the loan is released which can sometimes cause a financial hardship for families. However, families can apply to have their Plus loan payment deferred based on financial issues.

If your parents are denied a Parent Plus loan during their credit check, your university can offer you additional (but limited) unsubsidized federal loan funds. An independent undergraduate student's parents cannot borrow a Parent Plus loan to cover a student's educational expenses.

One big plus to repaying a federal student loan is that the government has created several options for students to reduce the financial burden on them as they begin their professional careers. In some cases, like serving in the military or working in the public sector, you can even have a portion of your loans forgiven or paid off for you after graduation.

All Federal Loans require that the borrower be a U.S. citizen, national, or permanent resident.

Private education loans

Private education loans are credit-based loans that can be borrowed from private lenders to cover educational costs. Loan amounts are limited based on your credit (or your co-signors credit) and your school's cost of attendance (minus any other aid you already accepted from the college or university). Terms for qualifying and repayment, as well as interest rates, vary from lender to lender. The negatives attached to private loans are that they are almost always unsubsidized and the majority tend to accrue interest at variable rates. That may not seem bad while interest rates are low, but can hit you hard if interest rates are high.

While one year of loan debt may not seem so bad, four years of financing can get expensive fast. So, when you sit down with your financial aid advisor make sure to get a total estimate of what your student loan debt should be when you graduate. Then, go home and research average starting salaries and contemplate what a manageable amount of student loan debt looks like for you. That way, you won't have to invest any of your precious post-graduation time moving back in with your parents.

Erica Shafer is the Associate Director of Financial Aid at Colorado College. She has worked in the field of financial aid for six years and enjoys it immensely. As once an undergraduate student who utilized financial aid herself and now both a graduate International MBA candidate and a financial aid adviser, Erica has been able to gain a vantage point of the financial aid arena which spans the outlooks of all parties involved in the financial aid process.
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