Student Loans

Education can be one of the more expensive items on your personal budget. If you plan to send yourself, your spouse, or your children to school, college tuition can become an even bigger expense than your home mortgage.

There are essentially two categories of student loans: Federal Loans and Private Loans. Today, most student loans are federally regulated, and for the most part, taken out of the hands of private companies; however private student loans can still be found through a variety of local lenders and commercial banks.

What costs need to be considered?

The total cost of attendance is unique to each school, and may vary from year to year.  It is calculated by adding the following five items:

  1. Tuition and fees
  2. Books and supplies
  3. Room and board
  4. Transportation
  5. Allowable Personal expenses

Federal Student Loans – Stafford Loans

There are two main categories of federally regulated student loans; subsidized and unsubsidized; both part of the Stafford Loan offering. The main differences between the two is when and how the interest is paid, and in the maximum loan amount for each program.

Subsidized Student Loans

The government subsidizes these loans by paying the interest for you during the time which you are in school.  That means any interest accumulated during the term of the loan while you are in school is paid by the government.  Depending on the size of your subsidized student loan, those interest payments could amount to thousands of dollars in savings. For instance, a $6,000 subsidized loan at 6.8% would accrue approximately $408 in interest charges each year.  Over the course of four years, that’s $1,632 in interest for which you are not responsible.  You would graduate owing only the original principal amount of the loan, $6,000.

Federal direct subsidized loans are based on need. To be approved for a subsidized loan you will be asked to submit information about your family’s yearly income, usually by supplying the previous year’s tax returns. 

Unsubsidized Student Loans

These loans are federally regulated student loans for which the interest is not paid by the government.  Like the subsidized loan, you are not required to make any interest or principal payments during the loan term while you are enrolled in school, but the interest continues to accumulate during that time and is then capitalized and added to the loan’s outstanding balance at the end of your school years.

If you are not eligible to receive subsidized funds, the remaining amount of approved financial assistance will be unsubsidized.

Loan Limits

For a dependent student, that is a student living with her parents and claimed under their tax returns as a dependent, the maximum loan amount is $5,500.  For an independent student, the maximum loan amount is $9,500.  In both cases, these amounts are valid for first years students (freshman), and of which $3,500 could be subsidized.  For second year undergraduate students the numbers rise to $6,500 and $10,500 for dependent, and independent students, respectively. For third and fourth year undergraduate students those numbers are even higher, $7,500 and $12,500, respectively.  Graduate students are considered independent students, and they can get up to $20,500 per year in federal direct Stafford loans.

Federal Direct Plus Loans

These loans are credit-based loans for parents of students to help pay the cost of children attending school.  These loans typically cover the cost of attendance, minus any other financial assistance.  For example, the total cost of attendance for a school may be $40,000 per year, and you have been approved for $10,000 in direct Stafford loans.  That means you can receive up to $30,000 in PLUS loans, if approved.

Private Loans

Private loans were more prevalent in years past than they are today, but some students still prefer to use private lenders for their education loan needs.  Private student loans are underwritten more on a credit basis than a need basis; and are almost always offered at a higher interest rate than the federally managed student loans.

Student Loan Interest Rates

Stafford Loans have a fixed interest rate of 6.8% for loans, though you may be able to receive a discount off that rate for continued on-time and electronic payment.  All government funded loans retain that same rate.  Private student loans are set by the individual lender, and can vary greatly from borrower to borrower.  Private loan interest rates could therefore reach the mid-teens, or even higher. Make sure to read the fine print of a private loan before accepting any money or committing to a private loan repayment schedule.

Grace Period After Completion of School

To obtain a student loan you must be attending school at least half time.  When school is complete, you have a six month grace period during which time no payments are due.  This time gives graduates a chance to find employment and to start generating income.  After the grace period ends your student loans would then be payable at the agreed upon interest rate, and monthly loan payments would then have to be made. Plan carefully so you don’t find yourself swimming in excessive student loan debt after you graduate.

Loan Forgiveness

A great feature of federally governed student loans is that they can be forgiven if you accept a job with several government and public sector employers.  That means a portion of your unpaid outstanding loan balance will be forgiven, thus reducing the remaining portion you owe.  For instance, joining any one of the armed service branches, working as a public sector teacher, or even with certain non-profit entities, you may be able to receive forgiveness on certain amounts of your student loans. Loan forgiveness can help bring your student loans to a close much quicker, sometimes shaving months, if not years, off the final loan term; at the same time saving you thousands on interest payments.

Deferring or Forbearing a Student Loan

If you are facing a hardship, like loss of employment or inability to earn wages, you may be able to put your student loan accounts on forbearance.  This is typically a feature offered through federally governed student loans, but not private student loans. A forbearance allows you to defer any loan payments for a set period of time or until your financial situation changes. 

Loan deferments can be made for several weeks, months, or even a year or two. Defaulting on your student loans can become very costly.  In addition to fees, you may not be able to borrow additional money for educational purposes in the future.  If your income has been reduced and you have a hardship paying your student loans a deferment or forbearance agreement may help keep your loan account active and keep your credit score relatively in tact. 

Remember, a deferred loan will continue to accumulate interest; and that interest will be capitalized and added onto the outstanding balance of the loan when the forbearance period has ended.  That could cause an extension in the life of your loan, a higher monthly loan payment, and an overall higher amount of interest to be paid on the loan.

Applying for a Student Loan

The process by which you apply for a student loan is not much unlike the process applying for a home loan.  you’ll need to fill out an application, submit financial information, and proof of residency or citizenship status.

To apply for a federal direct loan you’ll need to complete the Free Application for Federal Student Aid (FAFSA) form.  To take out a direct loan for the first time you’ll need to fill out a master promissory note (MPN), which can be done through  The government will then follow up directly with your chosen school and you will be notified of your award by mail.  The MPN must be filled out at least one month prior to the start of the school term for which you intend to study.