The Best Way to Borrow for College
As recently as the early 1990s, most students did not take out college loans. Today, almost two out of every three college students borrow due to runaway higher education costs.
The typical student borrower leaves college with roughly $35,000 in debt. As a result, federal college loan debt now exceeds credit card debt.
The level of debt is less risky and more manageable if the student only has federal student loans. For most students that means taking advantage of federal Direct Subsidized and Unsubsidized Loans.
Federal Student Loans
Here is why federal student loans are superior:
Students, regardless of income, qualify for these loans if they are enrolled at least half time and complete the FAFSA.
Students receive the same interest rate regardless of credit scores.
The loans offer student repayment plans based on a graduate’s current salary.
The loans offer a public service student loan forgiveness program.
The loans are designed strictly for students. Borrowers must begin repaying these loans shortly after graduating or leaving college.
Subsidized Vs. Unsubsidized Loans
The interest rate on both subsidized and unsubsidized federal loans for the current school year is 4.29%. The interest rate is adjusted annually on July 1 and is linked to the 10-year U.S. Treasury note.
The better loan option for college students is the subsidized loan. Students who qualify for a subsidized loan don’t have to make interest payments while they are enrolled in college. The federal government covers these interest payments. In contrast, student borrowers with unsubsidized loans are responsible for making interest payments while in college.
Qualifying for a Direct Subsidized Loan
The college to which your child is admitted will tell you if he/she qualifies for a subsidized loan. Look at the financial aid package that your teenager receives to see what the breakdown is between subsidized and unsubsidized loans.
A federal formula is used to determine if a student, based on a family’s finances, is eligible for the subsidized deal. The majority of subsidized federal loans are awarded to students whose family’s adjusted gross income is less than $50,000.
If a student takes the traditional four years to graduate from college, the maximum he/she can borrow is $27,000. If the student needs more time to graduate with a bachelor's degree, he/she can only borrow an additional $4,000.
Use Federal Student Loans First
Students should turn to federal loans first when borrowing for college. They should not consider taking out private loans until they have borrowed the maximum allowed by the federal program.