* Editor’s Note: This one-year financial literacy series is sponsored by PSECU.
The majority of people who attend university borrow money to pay for their education. While many types of debt can help students pay for their education, such as credit cards, personal loans, and home equity loans, student loans are the most common type of school debt – 93% of people who borrowed money for their own college education took out student loans. Among the students who graduated in 2018, 65% graduated with student loan debt, and the average amount of debt was $ 29,200 per student.
If you are in the process of applying for financial aid and plan to use loans to pay for some or all of your education, it is important to know what loan options are available to you, as well as what each. option will mean for you during your time in college and after graduation.
There are two distinct categories of student loans: federal loans and private loans. Read on to learn more about how these loans work and the differences between the two.
Federal student loans
The Federal William D. Ford Direct Loan Program provides loans to undergraduate, graduate and professional students. Loans come directly from the federal government – the US Department of Education acts as a lender, rather than a private bank or other type of financial institution. Two categories of federal loans are available: subsidized and unsubsidized. There are also Direct PLUS loans, which are available for parents of undergraduates and for graduate and professional students.
There are several notable differences between subsidized and unsubsidized federal loans.
Federal subsidized loans are only available to undergraduates. To be eligible for a subsidized loan, you must demonstrate financial need. The loan amount is based on your year of study. The maximum amount you can borrow under the soft loan program is $ 3,500 in your first year, $ 4,500 in your second year and $ 5,500 the third year and all the years after that. The subsidized loan limit for your whole undergraduate career is $ 23,000.
When you apply for financial aid, your school will tell you how much you can borrow under the soft loan program. Under the program, you cannot borrow more than your total financial needs. If you attended college for four years and your school determined that you were eligible to borrow the maximum subsidized loan amount for each year, you would have graduated with a federal subsidized student loan debt worth $ 19,000.
A key benefit of the subsidized loan program is that the US Department of Education will pay the interest on the loan while the borrower is still in school and enrolled at least part-time. The government will continue to pay interest on a subsidized student loan for the first six months after a student graduates or leaves school. If you have to defer loan payments at any time, the government will also pay interest.
While federal subsidized loans are only available to undergraduates, unsubsidized loans are available to all undergraduates and post-secondary students, including graduate and professional students. A student also does not need to have proof of financial need to borrow under the unsubsidized loan program.
The federal government does not pay interest on unsubsidized loans. A student can choose to pay the interest while still in school, or they can choose to add the accrued interest to the principal amount after graduating or leaving school.
Unsubsidized loans have higher limits than subsidized loans. For graduate and professional students, the the annual limit is $ 20,500. For undergraduates, the maximum amount of unsubsidized loans they can take out is based on their year of study, whether they have subsidized loans or not, and whether they are dependent or not.
During their undergraduate career, a dependent student may purchase up to $ 31,000 through the Federal Student Loans Program, with a maximum of $ 23,000 in the form of subsidized loans. The remaining amount may be unsubsidized loans. If a student does not qualify for subsidized loans, they can borrow up to the annual limit and for life as unsubsidized loans.
An independent undergraduate student can subscribe up to $ 57,500 in total during their college career, with no more than $ 23,000 coming from subsidized loans. Students who end up pursuing graduate or professional studies can use up to $ 138,500 throughout their schooling, with not more than $ 65,000 in the form of subsidized loans.
Apply for federal loans
If you want to apply for a federal loan, you must complete the Free Federal Student Aid Application. The FAFSA asks you about your income and savings, and your parents’ income and savings if you are a dependent student.
Your school uses the information you provide on the FAFSA to determine how much aid you are eligible for and the types of aid you can receive. They’ll then send you an award letter letting you know if you’re eligible for subsidized or unsubsidized loans (or both), and how much you can borrow.
You don’t need to undergo a credit check to get a federal student loan. The interest rates on the loans are fixed, so they stay the same throughout the life of the loan. They are also generally lower than private loan rates.
Private student loans
The maximum amount that a third year or above undergraduate student can withdraw under the Federal Loan Program is $ 7,500 per year. The average cost of tuition, fees and room and board for full-time students at all post-secondary institutions was $ 23,835 in 2017-2018. The average cost (accommodation and meals included) at a the private non-profit college was even higher at $ 46,014 in 2017-2018. Even if you borrow the maximum amount allowed under the federal loan program, you could find yourself facing a significant funding gap.
This is where private student loans can come in. Private loans are issued by a credit union, bank, or other type of financial institution. While federal loan eligibility is based on information provided on the FAFSA, private loan eligibility is based on your credit history. A lender will manage your credit before deciding to approve you for a private student loan. You may need to have a co-signer, such as a parent, if you have little or no credit history.
When you take out a private student loan, you are responsible for paying the interest on the loan at all times, although some private student loan programs allow you to defer interest and payments until you have graduated or left. school. The interest rate can also change over time on a private loan.
It is worth shopping around if you are considering taking out a private loan to pay for your education. Different lenders will offer different interest rates, terms, and repayment options. For example, some lenders may allow you to make interest payments only on your loan for the first 12 months after leaving school.
PSECU can help you pay for your studies
We believe that a college degree can help secure a bright financial future. That’s why we want to help make university affordable by partnering with Sallie MaeÂ® to make available several student loan options to help lower the cost of college education. The Smart Option Student Loan for PSECU by Sallie MaeÂ® offers competitive rates and flexible reimbursement options.
We also believe that you shouldn’t have to pay to use your own money. Our savings and chequing accounts have little or no fees, which students can appreciate. We also provide tools to help make informed decisions on things like borrowing. Using our student loan calculator can help you determine how much you can borrow for your education and repay after graduation.
Find more ways to save and pay for your education by visiting our online learning center.
The content provided in this publication is for informational purposes only. Nothing that is stated should be construed as financial or legal advice. Certain products not offered by PSECU. PSECU does not endorse any third party including, but not limited to, referenced individuals, businesses, organizations, products, blogs, or websites. PSECU does not guarantee any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal or other professional if you have any questions.
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