Education FundMost families end up borrowing to cover college costs.

More than 70 percent of college students rely on loans when pursuing a bachelor’s degree and many parents borrow as well.

The college loan season starts on July 1 when the federal government makes federal loans available for the 2016-2017 school year.

With the college loan season upon us, here are eight things you should know about college loans:

1. To qualify for federal loans, families must file the Free Application for Federal Student Aid (FAFSA). Filing the FAFSA is not necessary to apply for private loans.

2. The best loan to tap first is the federal Direct Loan for students.  Students can borrow, regardless of their income, if they are enrolled at least half time.

The interest rate for the Direct Loan for the 2016-2017 school year is 3.76%. That’s slightly lower than last year’s rate.

3. There is a cap on what students can borrow through the Direct Loan program. Here is the cap that will apply to most students:

  • Freshmen: $5,500

  • Sophomores: $6,500

  • Juniors: $7,500

  • Seniors:  $7,500

Students who take longer than four years to graduate can borrow up to a maximum of $31,000.

4. A big reason why the Direct Loan is superior is because it provides a safety net for borrowers. If graduates (or dropouts) are underemployed or unemployed, they can qualify for a federal income based repayment program that allows them to repay their loans based on what they are earning rather than what they owe.

5. The federal loan for parents is the PLUS Loan, which is designed to allow parents to borrow the amount that isn’t covered by a child’s financial aid package. The maximum amount that a parent can borrow will depend on how much aid a student received in grants and federal student loans, as well as a school’s cost of attendance.

The interest rate on the PLUS is much higher (6.31%) and parents get hit with a 4.29% fee on the borrowed amount. It’s a stiff price to pay.

6. For parents with excellent credit, private parent loans can be a cheaper alternative than the PLUS. The interest rate on these loans will be highly dependent on a parent’s credit score.

Private loans have traditionally been student loans that a parent or other adult has had to cosign.  Private parent loans, however, have arrived on the scene. So far, only a few lenders have rolled out parent loans including Wells Fargo, SoFi, Sallie Mae and Citizens Bank.

7. If you are interested in the traditional private loan where the student is the primary borrower, you can find loans through these sources:

  • Banks

  • State lending authorities

  • Credit unions

  • Online lenders

Private loans offer fixed and variable rates while federal loans have fixed rates.

8. An excellent resource when exploring your private loan options is a new website entitled, Private Student Loans Guru. Mark Kantrowitz, a nationally-recognized financial aid expert, created the website that includes background on private loans, as well as entities that make these loans. 

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