How the Borrowing Process Works
Need Loans vs. Outside of Need Loans
Today, federal loans are the largest form of student aid, making up about 45 percent of the total aid awarded to undergraduate students and 65 percent to graduate students each year. Most students can expect to receive a loan as part of a financial aid package. There are two broad categories of loans; loans based on financial need and loans not based on financial need.
Loans Based on Financial Need
The federal government is the principal provider of need-based loan funds. Your child's award letter will list the type and amount of need-based loans.
Features of Need-Based Loans
Need-based loans usually share three distinct features:
- Low Interest Rates
In 2009-10, Subsidized Stafford Loans have a fixed interest rate of 5.6 percent. In 2010-11, the interest rate on Subsidized Stafford Loans drops to 4.5 percent. Unsubsidized Stafford Loans continue to have a fixed interest rate of 6.8 percent. For PLUS Loans for parents, the interest rate is fixed, at either 8.5 or 7.9 percent, depending on whether the college participates in the Federal Family Education Loan (FFEL) Program or the Federal Direct Loan Program. The Perkins interest rate is currently 5 percent. No credit check is required for a federal student loan. - Delayed Repayment
With a need-based federal student loan, no payments on principal are due until after your child graduates or leaves school. - In-School Interest Subsidy
This means the government pays the interest that accrues on the loan while your child is in school and during the six-month grace period after graduation, resulting in substantial savings. Without this subsidy, either your child would need to make interest payments while in school, or those payments would be added to the principal of the loan, making it a much more expensive loan.
Three Need-Based Loans
Typical need-based loans are Perkins Loans, subsidized Stafford Loans, and subsidized Direct Loans. For loans based on financial need, the aid office will help guide your child through the process.
- Perkins Loan
If your child has been awarded a Perkins Loan, the Financial Aid Office sends a promissory note that must be signed and returned. Since the college already has been given its Perkins funds, it simply transfers the loan to your child's student account as a credit against charges. - Subsidized Stafford Loan
For a Subsidized Stafford Loan, the aid office will ask your child to choose a lender. Many lenders offer online loan applications. Once your child completes the loan application (a master promissory note) and the loan is approved, the money is sent by the lender to your child's school. The loan amount typically will appear as a credit on your child's account. - Subsidized Direct Loans
Direct Loans work the same way as Stafford Loans except that the federal government is the lender.
Non-Need-Based Loans
Often, non-need-based loans are used to help families that can't afford to pay their expected contribution from savings and current income.
Some colleges will include one or more of these loans in your child's award letter. When you calculate your family's share of costs, and if you find that it is more than you can afford, it's time to consider these loans.
Features of Non-Need-Based Loans
Non-need-based loans:
- Usually have higher interest rates
- Have no in-school interest subsidy
- May also require that repayment of principal begin immediately
Three Non-Need-Based-Loans
The three main types of non-need-based loans are unsubsidized Stafford or unsubsidized Direct Loans for students, PLUS Loans for parents, and private loans for students.
- Unsubsidized Stafford or Direct Loans
The term "unsubsidized" means that the federal government does not subsidize the interest on the loan while your child is in school. Your child must file a FAFSA before applying for an Unsubsidized Stafford Loan. The Student Aid Report (SAR) will show your computed Expected Family Contribution (EFC). When your EFC is subtracted from the cost of education, if a balance remains, your child is eligible for a Subsidized Stafford Loan that is equal to the balance, not to exceed the annual loan limit. If not, your child is eligible for an Unsubsidized Stafford Loan. Your child must complete the same master promissory note whether the Stafford Loan is from the FFEL Program or the Direct Loan Program, and whether it is subsidized or not. Once the loan is approved, the funds are sent to your child's school. - PLUS Loans
This is a parent loan, sponsored by the federal government, that is unrelated to need. Generally, parents can borrow up to the total cost of education, minus any aid received. Many lenders will provide quick pre-approval for a PLUS Loan within minutes, either online or over the phone. Once the application is completed and the loan is certified by the school, the money is sent to the student's school. - Private or Alternative Loans
Private education loans are available to students, usually at higher interest rates than the federal loans described above. In almost all cases, a credit check and eligible cosigner is required. Colleges and universities may provide a list of private loan sources. You can check with banks or other financial institutions with which you have accounts.
While not considered financial aid, for many families, these non-need-based loans can play an important role in making college affordable, particularly for families that are unable to pay the family share from current income and savings.
