Importance of your Student Loan Structure

Students and parents spend hours researching colleges, looking for scholarships, and trying to find the silver bullets to lower the “WHAT” they will pay for college.  As more families need to borrow money to attend college, more time needs to be spent on the “HOW” you are going to pay these expenses.  The importance of your student loan structure will determine your repayment options, loan forgiveness, credit score, and who is legally responsible if a default should occur.  These student loan decisions will impact a student’s and parents’ life for the next 10 to 30 years.  Getting the loans is often not the problem.  It is a future repayment that is not transparent.

The lack of information and complication is growing.  To help you better understand your student loan options, we listed what you need to know below.

Types of Federal Student Loans

Most undergraduate students are limited to only $27,000 to $35,000 of federal student loans.  The federal direct student loans are the legal responsibility of the student to pay back. If additional student debt is needed to fund a shortfall, a parent or other person will be directly or indirectly responsible for those loans.  This other person will need to co-sign or sign for the additional student loan.  It is also important to understand that these loans have annual loan limits. When creating a four-year college borrowing strategy, a family needs to consider their current saving, annual cash flow, and these loan limits to properly create the best student loan structure.

For postgraduate studies, the student could qualify for federal loans up to the cost of attendance.  As more careers require post-graduate studies, this planning needs to be considered.  Undergraduate federal loans have a much lower interest rate and fees than federal graduate loans.  This is another example of the importance of your student loan structure.

Federal Direct Subsidized Loan (Stafford)

Federal Direct Subsidized loans are offered by the government to help students pay for an associated degree, undergraduate degree, community college, trade, career, and technical schools.  The loans are based on the student’s financial need and the amount you receive can’t exceed your financial need.  The U.S. Department of Education will pay the interest on a Direct Subsidized loan while you are in college and repayment will begin six months after you leave school.  Loans issued after 7/1/2012 will have the interest begin to be charged one month after you graduate or stop going to school.

There are benefits to the Federal Direct Subsidized loan.  This loan will maintain its interest-free status while the student is in school and in some loan repayment methods.  This would include undergraduate and graduate studies.  An added benefit is that this loan is the student’s responsibility to pay back.   A parent does not need to co-sign for this loan.

It is important that families understand that to qualify for this loan, the student must complete a FAFSA form based on their filing status.  Our previous blog, “Completing the FAFSA”, outlines this process. 

Federal Direct Unsubsidized Loan

Federal Direct Unsubsidized loans are offered by the government to help students pay for an associated degree, undergraduate degree, community college, trade, career, and technical schools.  These loans are not based on the student’s financial need.  This loan is the legal responsibility of the student and not the parent. To qualify for this loan type you only need to submit the current year FAFSA form.  The interest on a Direct Unsubsidized loan will be charged interest while you are in college and repayment will begin six months after you leave school. 

This loan will always be charged interest but you can defer payment when you are enrolled in a qualified program. 

Interest rate & Loan Limits

Both the Direct Subsidized and the Federal Direct Unsubsidized Loan have a fixed interest rate that will be charged 7/1 of each year.  The interest rate is fixed for the life of each loan.  This is why a student may have different interest rates depending on the types of loans taken out each year.  The rate will change if the loan is consolidated.  Click here to view our blog article that lists the interest rates for federal loans first disbursed on or after July 1, 2022, and prior to June 30, 2023.

What often is not discussed is that there are specific limits to the federal loans that the student can obtain in their name with limitations based on the year and academic progress.  As an example, a dependent, first-year undergraduate student has an annual loan limit of no more than $5,500.  This amount is further broken into the student receiving no more than $3,500 in subsidized loans if the eligibility fits.

Parent Direct PLUS Loans

Parent Direct PLUS Loans are federal unsubsidized loans funded through the government and given to parents of dependent students to pay for college.  There is interest charged to this loan while the student is in school.  Although the Parent PLUS loan will always be charged interest, you can defer payment while the student is enrolled in a qualified program.  

The loans are not based on the student’s financial need.  To qualify for this loan type, you only need to submit a current-year FAFSA form and this does not always guarantee approval.

To qualify for this loan, the student must complete a FAFSA form based on their filing status.  Parent PLUS loan limits are based on the student’s financial aid award.  If the parent is denied a Parent PLUS loan, the student will qualify for an additional Direct Unsubsidized Loan depending on their academic progress.

The responsibility to repay the Parent Direct PLUS loan is the parent of the student.  It is the parents’ loan, not the students’.  Many parents may take this loan out with the intention of the student repaying this loan. Please never lose sight that it is in your name and ultimately your responsibility and credit score that will be.

Direct Graduate Plus and Direct Graduate Stafford

As stated above, graduate loans are becoming more common as more careers require that level of education.  The difference about federal graduate loans in most cases, the limits can cover a majority of the cost, and they are in the student’s name only.  The problem is the administrative fees and interest rates are much higher.

The biggest advantage is these loans are federal loans and carry the major benefits of federal loans, such as better repayment options, loan forgiveness, death, and disability coverage.  The FAFSA form is still required to be submitted each year when seeking a federal graduate loan.

Creating a College Funding Plan

To identify any college funding shortfall, we recommend a family creates a four-year cash flow analysis of college cost and expenses.  This will improve your ability to implement a debt structuring plan and engage your child in the estimated cost of their college education.

Part of this analysis needs to include a review of the various student loan repayment methods as well as identifying whether loan forgiveness is an option.  Because federal student loans are easy to obtain, students often do not realize the number of loans that will be necessary to pay for college or the impact this debt will have on their life when they graduate.  Your student debt structure will determine your loan repayment and forgiveness options. 

All this can affect what their financial life will look like after graduation.  This is why having a student loan discussion early will better prepare your child for the financial realities of the world after graduation.

Preventing Excessive Student Debt

 Our company’s mission is to solve the student debt crisis.  We will never be able to solve the problem without preventing it.  Having the ability to create a customized plan based on your college award and a family’s resource is essential.  Instead of focusing primarily on admissions, a movement to envision an outcome is part of our goal.  These articles and software solutions are our steps to creating more transparency and a better financial future for families.  

If you are a student or parent that needs help projecting the cost of college or possible debt scenarios, the College Cost Analyzer and In College Payer can easily project your total student loans.

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