One of the most daunting parts of planning for college is figuring out the financials. You’ve applied for student aid, grants, and scholarships, and now you need to make up the difference with student loans.
In this article, you will learn what student loan options are available to you and what the maximum borrowing limits are for each.
Student Loan Options
There are many options to choose from when taking out loans for education. They fall under two primary categories:
- Federal student loans
- Private student loans
Federal student loans are offered by the U.S. Department of Education. To apply for these loans, you will need to complete and submit the Free Application for Federal Student Aid (FAFSA), which can also qualify you for certain grants, which do not have to be paid back like a loan.
Federal student loans may be subsidized (meaning that the federal government pays the interest on these loans while you are in school or during grace periods) or unsubsidized. Subsidized loans are granted based on financial need, while unsubsidized loans are available to everyone. The interest rates on these loans tend to be lower than private student loans and are fixed each year and not dependent on your credit score or financial history.
Graduate and professional students may also take out unsubsidized federal loans at slightly higher interest rates. Federal Direct PLUS Loans are additionally available for both graduate and professional students and parents of dependent undergraduates to help pay for education expenses not covered by other financial aid.
Many private banks and lending institutions also offer student loans. The terms of these loans are generally not as good as what you can get from a federal student loan, and the options for repaying and loan forgiveness are also not as flexible. These loans may have variable or fixed interest rates, which depend on your credit score.
Private student loans should generally not be your first choice for financing your education, but they can be a great way to cover the difference between what you can obtain from a federal financial aid package and the cost of your schooling.
Federal Student Loans for Undergraduates
When you attend an undergraduate or certificate program, you will likely submit a FAFSA form to see what federal aid you qualify for. Your financial aid package will include federal student loans if needed.
The types of federal student loans available for undergraduates have the following limits for dependent students:
- First year undergraduate annual loan limit: $5,500, with no more than $3,500 of this in subsidized loans
- Second year undergraduate annual loan limit: $6,500, with no more than $4,500 of this in subsidized loans
- Third year and beyond undergraduate annual loan limit: $7,500, with no more than $5,500 of this in subsidized loans
- Total loan limit: $31,000, with no more than $23,000 of this in subsidized loans
If you are an independent undergraduate student, or if your parents are unable to obtain federal PLUS loans on your behalf, then the loan limits are as follows:
- First year undergraduate annual loan limit: $9,500, with no more than $3,500 of this in subsidized loans
- Second year undergraduate annual loan limit: $10,500, with no more than $4,500 of this in subsidized loans
- Third year and beyond undergraduate annual loan limit: $12,500, with no more than $5,500 of this in subsidized loans
- Total loan limit: $57,500, with no more than $23,000 of this in subsidized loans
Federal Parent PLUS Loans
Most undergraduate students under the age of 24 are considered dependents of their parents. The federal government has a loan program that allows parents of these students to take out additional loans to pay for education expenses not covered by other financial aid.
Eligibility for federal PLUS loans does require meeting certain credit requirements, and not all parents may qualify. Note that, as mentioned in the previous section, if your parent does not qualify for these loans, the limit of what you can take out in federal unsubsidized loans is higher to compensate.
The maximum amount that can be borrowed in federal PLUS loans is the difference between the cost of attendance and the rest of the financial aid received. This means that these loans can be used to fully cover the remainder of school expenses if necessary, but keep in mind that interest rates on these loans are about 2.55 percentage points higher than Direct subsidized and unsubsidized loans for undergraduates.
Federal Student Loans for Graduate School
If you already have an undergraduate degree and are attending graduate or professional school, there are additional student loans from the federal government that you can take out to finance your education.
While you cannot take out subsidized loans in graduate school, you are eligible to take out additional unsubsidized loans. The interest rates on these loans are about 1.55 percentage points higher than undergraduate federal student loans and do not depend on your credit history.
Borrowing limits for federal unsubsidized loans for graduate or professional school are as follows:
- $20,500 annually while in graduate school
- $138,500 in total (this total includes any federal loans taken out as an undergraduate)
Graduate students also have the option of taking out additional PLUS loans. These are very similar in terms and conditions to the parent PLUS loans that can be taken out for undergraduate education, except these loans are taken out by the student, who is now considered independent.
To be eligible for PLUS loans, you must be enrolled at least half-time in an eligible school program leading to a graduate or professional degree or certificate and meet certain credit requirements. The maximum amount you can borrow in PLUS loans is the difference between the total cost of attendance and any other financial assistance you receive.
Private Student Loans
Private student loans are another option at your disposal for funding your education. There are many reasons you might consider turning to private loans, including:
- You have maxed out all federal loan borrowing options and need additional funds. If you are an independent undergraduate student whose education costs exceed the limits of the federal subsidized and unsubsidized loans, or if you are a dependent student with parents unable or unwilling to take out a parent PLUS loan, you might hit the federal lending limits. You may also be a graduate student who is unable to qualify for PLUS loans.
- You have impeccable credit, which qualifies you for the lowest interest rates. While in general, federal student loan interest rates are among the lowest, it is possible to obtain lower interest rates on private loans if your credit is good.
- You are not a U.S. citizen or a green cardholder. In this case, you do not qualify for federal student aid or loans from the U.S. government.
- Your school or program is not eligible for federal aid. While most accredited programs in the U.S. participate in the federal student aid program, there are some exceptions. If your school does not have access to federal aid, a private loan might be the way to go.
Loan limits for private student loans can vary greatly based on both the lender and your credit history. It’s good to keep in mind that the terms associated with private student loans often aren’t as good as those for federal student loans. The federal student loan program is backed by the government and offered as a public service, whereas private lenders are in the business to make money.
Federal loans offer much more flexibility with repayment options and also include programs for loan forgiveness and forbearance. Private lenders are less forgiving when it comes to missing payments or running into financial problems. Always read all of the fine print when signing loan documents, and make sure you are fully informed about the terms and conditions.
How Much Should You Borrow?
Instead of looking at how much you can borrow, it is a good idea to consider how much you should borrow. Take into consideration your future career plans and earning potential and make sure any future loan payments fit within that budget.
It’s always a good idea to exhaust any “free money” options before resorting to student loans. Apply for grants and scholarships and seek out all other forms of financial assistance that might be available through the federal and local government, the school you are attending, and any programs or organizations that want to support education. Many “free money” sources are available based on need, academic performance or promise, or both.
The resources available at College Finance can help guide you in the best financial decision-making when it comes to planning for college. Our goal is to help students, parents, and graduates make informed choices about financing their college education. We believe that with the right data, people can make decisions that will minimize their borrowing costs and help them get the most out of their higher education investment.