1. Student Loans: Introduction
  2. Student Loans: What Can You Afford to Borrow?
  3. Student Loans: How Federal Student Loans Work
  4. Student Loans: Private Loans
  5. Student Loans: How Student Loan Repayment Works
  6. Student Loans: Paying Off Your Debt Faster
  7. Student Loans: How Federal Student Loan Consolidation Works
  8. Student Loans: Private Loan Consolidation
  9. Student Loans: Conclusion

Federal student loans should be the first place you look if you want to borrow money for college. They’re the easiest to qualify for and have the best terms and the lowest interest rates because the U.S. Department of Education guarantees the loans with taxpayer dollars. So how do you get one?

The Free Application for Federal Student Aid (FAFSA)

If you want to be considered for federal, state or school loans, grants or work-study jobs, you must complete the FAFSA.

The easiest way to complete the FAFSA is online, but you can also print a PDF and mail it in or request that a paper copy be sent to you for completion. There are three filing deadlines you must adhere to: 

1. The federal deadline; this is midnight central time, June 30, 2019, for the 2018–19 school year.

2. The state deadline, if you’re applying for any state financial aid programs. Deadlines vary considerably by state.

3. The deadline of each school you’re applying to.

Failure to meet any of these deadlines could mean missing out on financial aid. (See Student Loans: Don’t Delay on FAFSA.) And financial planners recommend completing the FAFSA even if your family is wealthy.

The deadlines are misleading, however, in that you really don’t want to wait until the deadline to submit your application. Instead, you want to submit it on the first date that applications are accepted, which was October 1, 2017, for the 2018–19 school year, and will likely continue to be on or around October 1 for subsequent school years. Many aid programs have limited funds, and the earlier you apply, the more likely you are to receive those funds if you qualify financially. You must complete the FAFSA each year to remain eligible for federal student aid. (See 6 FAFSA Errors You Can Easily Avoid.)

We won’t bore you with all the details on how to complete the FAFSA; the 10-page form with two columns per page includes four pages of instructions. Basically, to complete the financial section of the FAFSA you’ll need your and your parents’ tax returns for the year two years before the school year you’re applying for (the 2016 return for the 2018–19 school year). The other questions you’ll know the answers to unless you have a complicated family situation. You’ll likely need your parents’ help completing the form, since it asks for nearly as much information about them as it does about you. (Learn about strategies for maximizing your financial aid in When Saving for College Is a Bad Idea.)

Types of Federal Student Loans

The two federal student loan programs are Federal Direct Loans, so-called because the U.S. Department of Education is the lender, and Perkins Loans, for which the school is the lender. However, the Perkins loan program expired September 30, 2017, and no Perkins loan funds will be distributed after June 30, 2018. 

Direct student loans are granted through the William D. Ford Federal Direct Loan Program and  come in four varieties. Direct Subsidized Loans are available only to students who demonstrate financial need, while Direct Unsubsidized Loans are available regardless of financial need. For subsidized loans, the government pays the interest while the student is in school or the loan is in deferment. Direct PLUS Loans are available to graduate students, professional students and parents of undergraduate students, and Direct Consolidation Loans combine all your student loans into a single loan with a single payment. (Learn more in A Quick Guide to How FAFSA Loans Work.)

Federal Student Loan Limits

Undergraduate students can borrow up to $5,500 per year via Perkins loans depending on financial need and how much money the school has available to lend, subject to the program’s expiration. Undergrads can also borrow $5,500 to $12,500 per year in Direct Subsidized Loans and Direct Unsubsidized Loans, depending on what year of school they’re in and other factors. Those factors include whether a parent claims the student as a dependent (independent students can borrow more) and aggregate loan limits. Aggregate loan limits determine how much students are allowed to have borrowed in total federal loans based on their year of schooling and dependent status. For example, for dependent undergrads, the aggregate direct loan limit at graduation is $31,000, of which no more than $23,000 can be unsubsidized loans. 

Graduate students can borrow up to $8,000 per year via Perkins loans and up to $20,500 per year in Direct loans (unsubsidized only). They can borrow the rest of what they need through PLUS loans, subject to credit qualifications. Similarly, a parent can borrow the rest of what their dependent undergraduate student needs through a PLUS loan. 

Direct subsidized federal student loans are best, if you can get them. They’re only available to students with financial need as determined by the government, so they won’t be an option for everyone. 

Federal Student Loan Costs

When you take out a federal student loan, you’ll pay a fee plus interest on the amount you borrow, as the two charts below show.

Most federal student loans have fees that are a percentage of the total loan amount (though there are no loan fees for Perkins loans). The fee is deducted from your loan disbursement, which means you’ll receive less than the total amount you borrow. You must repay the entire borrowed amount. 

The chart below shows the loan fees for Direct Subsidized Loans, Direct Unsubsidized Loans and Direct PLUS Loans first disbursed on or after Oct. 1, 2016. 

In the next section, we’ll talk about private student loans.


Student Loans: Private Loans
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