Student Loans

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What are Student Loans?

Education is powerful. Having the right education is a prerequisite for many of today's top careers and often reflects a person's lifetime earning potential. Thanks to the wide availability of financial aid packages and student loans, almost anyone can get the education he or she needs.

If you are preparing for college for the first time, have children who are planning to attend, or are returning to school to further your education, understanding how student loans work is just vital. And if you are paying existing student debt, knowing your rights and responsibilities can help you pay your loans off in a way best suited for your life.

Continue reading for important information about the types of loans available, how to choose the right loan amount, what to do when you graduate or complete your education.

Types of Student Loans

Like all loans, student loans have interest rates, terms and conditions, and other details and requirements that need reviewing before signing.

The main issuers of student loans are the U.S. Department of Education and private lenders such as various banks or other financial institutions. In certain cases, states and some educational institutions issued loans also.

Federal student loans are available from the U.S. Department of Education under the Direct Loan Program or the Federal Perkin's Loan Program. Direct loans are issued by the Department of Education and available to most students while Perkin's Loans are issued by the school attended and are available to students with great financial need.

Direct Student Loan Amounts

Direct Loan Programs

All direct loans are made by (and all payments owed to) the U.S. Department of Education. This applies to any Federal student loan made on or after July 1, 2010. Loans made previously are handled by the lender, which may have included banks, financial institutions or other loan servicers.

Federal Family Education Loans (FFEL) are no longer offered and were replaced by the Direct Loan Program.

Stafford Loans

The most popular federal loans are also known as Stafford Loans and are either Direct Subsidized or Direct Unsubsidized loans.

Direct Subsidized: Available to undergraduate students only. Students must be enrolled in school at least on a halftime basis and demonstrate financial need. Loans are available in amounts from $3,500 to $5,500, depending on grade level, and have a total lifetime limit. Loan interest is not charged while the student is in school or during a deferment period.

Direct Unsubsidized: Available to undergraduate and graduate students. Students must be enrolled in school at least on a halftime basis. Loans are available in amounts from $5,500 to $20,500 (minus any subsidized loan amount) depending on grade level and dependency status. Loans have a total lifetime limit. Unlike subsidized loans, interest is charged at all times.

Direct PLUS Loan: These loans are for the parent of a dependent undergraduate student or for graduate and professional students who attend at least halftime. Like unsubsidized loans, financial need is not required. These loans are available for a maximum amount of the cost of attendance, minus any other loans received. Borrowers with a bad credit history are not approved.

Direct Consolidated Loans: This loan allows students who have completed school or graduated to consolidate their existing loans into one loan. Students must have at least one Direct loan or Federal Family Education Loan (FFEL) that is being repaid or in a grace period. No application fees are charged.

Federal Perkins Loan Program

Perkins loans are available to both undergraduate and graduate students with a demonstrated financial need. Perkins loans are made by the educational institution and are subject to the school's availability of funds (which may vary year-to-year). Undergraduates have a maximum of $5,500 available per year, with a maximum lifetime amount of $27,500. Graduate and professional students can qualify for as much as $8,000 per year with a lifetime maximum of $60,000 (including any undergraduate amount).

Private Loans

Private student loans are essentially personal loans that are used for educational expenses and issued by banks and other financial institutions. Most private student loans require a cosigner, have higher interest rates than federal loans and have less payment flexibility. However, borrowers with excellent credit can shop for the best loan rates, which may be lower than that of federal loans.

State Loans

Student financial assistance, including loan programs, is available at various levels throughout the United States. See our reference section for links to your state's programs.

Choosing Between Federal and Private Loans

Choosing the best loan for your needs is as important as choosing the right school. Before applying for a loan, consider these key differences between Federal and Private Loans. State loans will vary greatly and are not included in this comparison.

Direct SubsidizedDirect UnsubsidizedDirect PLUSDirect ConsolidatedFederal PerkinsPrivate Loans
EligibilityUndergraduateUndergraduate; GraduateUndergraduate parents; GraduateStudents with min. 1 Direct or FFEL loan in repayment phaseUndergraduate; GraduateUndergraduate; Graduate
Need based?YesNoNoNoYesNo
Attendance requirement1/2 time (min)1/2 time (min)1/2 time (min)None1/2 time (min)Varies
Interest accrualAt completion / graduationImmediatelyImmediatelyImmediatelyAt completion / graduationImmediately
Interest ratesFixedFixedFixedFixedFixedVaries
Credit score considerationNoneNoneDisqualified for poor creditNoneNoneCredit score affects interest rates and/or approval
Interest subsidyYesNoNoNoYesNo
Co-signer neededNoNoNoNoNoProbably
Direct Consolidation optionYesYesYes--YesNo
Prepayment feesNoNoNoNoNoNeed to check with lender

Number of Direct Loan Recipients

Federal Student Loan Rates

As of August 13, 2013, loan interest rates (fixed) are as follows:

  • Direct Subsidized and Unsubsidized Loans: Undergraduates – 3.86%
  • Direct Unsubsidized Loans: Graduate and Professional – 5.41%
  • Direct PLUS Loans – 6.41%
  • Perkins Loans – 5%

What to do Before Applying for a Loan

Once you've decided what school you (or your child) is planning to attend, the next step is determining how much of that cost you want to be covered by student loans. Qualifying for the maximum student loan amount doesn't mean that's what you should accept, especially if you don't need the money.

The following steps will help you determine how much you need and what it will be used for:

Calculate total college expenses

Tuition, books, activities fees, additional fees, required technology and supplies specific classes and areas of study. If you are a distance learner, additional technology services may be needed.

Calculate living expenses

If you are in school halftime or full time, especially if you're not working, you will still need living expenses. Be sure to factor in housing, food, transportation and other necessary costs. On campus students need to include room and board expenses.

Review all loan terms

Whether considering a federal or private loan, it's up to you to understand the terms and conditions of that loan. Can you answer these questions?

  • What is the interest rate?
  • How soon does the loan have to be repaid?
  • What happens if a payment is missed?
  • Can the loan be paid back early?
  • How much is the total cost of the loan?

Knowing the answer to these questions will help you choose the best loan for you.

Identify field(s) of study

Knowing why you are in school and what you expect from your education can help you identify whether the tuition amount is appropriate. For professional furthering, completing an education or meeting employment requirements, the answer is simple. But first-time students may avoid this question. However, having a goal, or at least a passion for education, is a must for college success. The real question is this: "Am I willing to go into debt for this education?"

Plan to repay the loan

Once your studies are over, how do you plan to repay the student loan? No matter what loan amount you receive, with few exceptions, you will have to pay the borrowed amount back. Thinking about a repayment plan now (even though it will probably change) can be a positive motivational factor in completing the education.

Loan Application Steps

Applying for a student loan does not have to be arduous. The following steps will help you know what to expect when you are ready to apply.

Step one: Talk to the school's financial aid office to find resources and to answer any questions you may have.

Step two: Apply for your FAFSA Pin Number. The FAFSA PIN number is needed to complete the FAFSA application.

Step three: Complete the FAFSA application and submit it.

Step four: Contact the schools financial aid office and confirm that they received the application. The school will provide the loan amount and disbursement date details.

Step Five: Start your classes. Many loans are only partially dispersed before classes start and may not cover certain expenses (like books). The school should be able to tell you the dates; it's up to you to start the course work, even if you don't have everything you need.

How Financial Aid is Determined

Student loans are approved based on the financial aid that is needed. These amounts vary by a number of factors and are determined by the institution's financial aid office. The following factors are generally considered in determining the financial aid need:

  • Tuition and fees
  • Living expenses or room and board (or study-abroad costs)
  • Book and resource expenses
  • Allowance for child care or other dependent care
  • Costs related to a disability
  • Expected Family Contribution (a formula used to calculate amount needed for at a specific school)

These amounts help the school determine not only the amount needed, but if you qualify for need-based loans.

Repaying Student Loans

Repaying student loans is a simple process for most since the majority of student loans are managed by the U.S. Department of Education. Private (and other) loans are handled through various loan servicers. There are several options for repaying student loans, including the following:

Option one – Choose a repayment plan

Different plans vary in the amount you owe and when it is due, so be sure to choose the plan right for you.

Option two – Deferment

Federal Direct Loans and Perkins Loans provide the opportunity to defer, or postpone, loan payments if you are experiencing financial hardships. Find out if this option is for you.

Option three – Forgiveness

If you meet certain qualifications, you may qualify for loan forgiveness. The resource section on this page will help you find out if you qualify.

Disputes and resolutions

If you have a problem with your loan or loan servicer, you may need to contact them and dispute the issue. Read the guidelines or try to solve the problem first.

How FAFSA Works

Infographic: The Student Loan Life Cycle
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Infographic: The Student Loan Debt Cycle
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Looking For Financial Aid?

These resources can help you find grants, scholarships, work study programs and more.

Federal Grants


Scholarships come in many different forms and amounts, and can vary from one place to another. The two most important places to check for scholarships are:

  • High School or TRIO Counselor
  • College/School’s Financial Aid office

Many scholarships are created through foundations, religious and nonprofit organizations, community groups, local business and civic groups. Check with these groups to see if they have available scholarships.

Don’t forget to stop at your local library’s reference section for additional resources.

Alternative Ways to Pay Off Student Loan Debt

Numerous programs exist to help you reduce your student loan debt through everyday purchases such as buying groceries, purchasing gasoline, or paying rent.

These programs are designed to reduce the overall balance of your loans and have been established by organizations which have partnerships with both loan servicers and retailers.


uPromise is a free program run by Sallie Mae that allows you to scan a membership card at participating retailers, or enter a membership number online -- and a percentage of your purchase earns you cash back that can then be used to pay down student loans.

If you do not have any student loans, the money can be placed in a tax-deferred savings account and later applied towards a college prepaid plan.

Student Loan Reducing Credit Cards

Credit cards that reduce your student loan balance are also an excellent option for paying off your student loans while building credit. Similar to uPromise itself, if you don't currently have a student loan, the money saved on eligible purchases using a card such as the one above can be applied to a prepaid college savings plan.