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The Most Attractive Student Loans

In the early 1990s, most students didn’t borrow to attend college. Today, about two out of every three students are relying on college loans to pay for their bachelor’s degrees.

According to the Project on Student Debt, the typical undergraduate borrows about $29,400. Whether this is a safe amount will largely depend on what type of loan students are choosing.

Since many families will need help to cover some of their costs, it’s important that advisors be equipped with the basics about borrowing for college. Here are some critical things that you need to know about student loans.

Superior Loans for Students

The best loans for students will almost always be the federal loans designed exclusively for them. The federal Direct Subsidized and Unsubsidized Loans are the most popular due to being widely available and the easiest to obtain. Until recently they were called Stafford Loans.

The Perkins Loan is a far less common federal option for students, and the availability for this loan, which charges a 5 percent interest rate, will vary by college campus. The interest for this loan does not accrue while the student is in school. Based on its access to Perkins funds, a college will determine if a student, who must have exceptional financial need, can receive this loan. The Perkins is not considered a direct federal loan.

The student's institution is the lender, and borrowers make payments to their school or the institution's loan servicer.

The interest rate on the popular direct loans issued for the 2014-2015 school year is 4.66 percent, which is a bit higher than the previous year’s rate of 3.86 percent. The government links the interest rates, which are adjusted once a year, to the 10-year U.S. Treasury note.

The most attractive loan for students will be the direct subsidized loan. This is the most desirable option because the federal government covers the interest that is generated while the borrower is enrolled in school. The government will also pay the interest later if a graduate ends up getting into financial difficulty and obtains an official deferment, which will temporarily stop loan repayments.

In contrast, any students who borrow through the unsubsidized loan are responsible for the interest that accrues while in college and during hardship deferments.

The vast majority of subsidized loans are awarded to students of families with adjusted gross income of less than $50,000. A federal formula is used to determine if a student is eligible for the more attractive subsidized deal. In a college financial aid letter, a family will see the breakdown between the subsidized amount (if eligible) and the unsubsidized portion.

Only students whose parents complete the Free Application for Federal Student Aid  (FAFSA) are eligible to tap into federal college loans. Students must also be enrolled in college at least halftime to qualify. Your clients may assume that they are too affluent to qualify for need-based financial aid, but if they want their children to borrow for college—or they want to access federal parent loans—they need to submit the FAFSA.

Borrowing Limits

There are limits to how much students can borrow through federal loans. Most students, who end up graduating in four years, will be able to borrow a maximum of $27,000 in direct loans. A student who takes more than four years to obtain a bachelor’s degree—and most do—can borrow up to $31,000.

Here is a breakdown on how much students can borrow each year through the direct student loans:

  • First year: $5,500
  • Second year: $6,500
  • Third  and fourth year: $7,500

Students can borrow considerably through the direct college loans if the government rejects their parents’ application for the federal Direct PLUS Loan. The PLUS is a far less desirable loan because it is more expensive and doesn’t have the repayment safety features that federal student loans do. For the current school year, the PLUS charges an interest rate of 7.21 percent with a 4.2 percent fee tied to each amount borrowed.

Students, whose parents don’t qualify for the PLUS, can borrow up to $57,500 (a maximum of $23,000 in subsidized loans) for their undergraduate years. That’s a huge amount of debt to take on, but parents can help students pay down these loans.

If the money is available, the most an eligible student can borrow through the Perkins Loan is $5,500 a year up to $27,500.

Federal student loans offer another attractive feature. These loans essentially offer a safety net to grads or college dropouts who find themselves unemployed or underemployed by allowing them to repay a loan based on what they are making rather than what they currently owe. The newest and best federal repayment program is called Pay As You Earn.

To get an idea of what monthly loan payments would be after graduation, take a look at the federal repayment calculator.

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