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When it comes to student loans, the real question is how much you should borrow, and the answer is: only as much as you actually need. It's never a good idea to take out extra student loans so you can live the high life while you're college. Focus instead on what the education itself will cost—which, of course, depends on your personal circumstances.
Will you be attending an expensive private university or a more affordable state school? Are you eligible for academic, need- or merit-based scholarships? Was your family able to build a college savings plan, or do you need to fund the entire cost on your own? Answers to these questions will help you determine the amount you need to borrow.
If you're paying for school yourself, prepare for sticker shock. According to the College Board, the average annual non-resident tuition at a state public school is now $23,890 and average tuition at a private university is $32,410 per year. And that doesn't include living expenses.
Gone are the days when summertime jobs could pay for college degrees. Along with work-study programs, grants and scholarships, student loans could get you through. Both the federal student loan program and private college lenders have their advantages and disadvantages. Here's how to consider all the angles before you sign on the dotted line.
Federal Student Loans
Loans from the U.S. Department of Education tend to have lower interest rates than those from private lenders. They also have more flexible payment options (including the possibility of loan forgiveness).
Direct (or Stafford) subsidized and unsubsidized loans are fixed-rate, which means the interest won't change during the life of the loan. However, they differ in some ways:
- Subsidized loans are for those who demonstrate financial need. A huge advantage to these loans is that the federal government pays the interest while you're in school if you're attending classes at least half-time, and for the first six months after you leave school (known as the grace period). The government also covers the interest if you postpone (defer) repayment.
- Unsubsidized loans don't require you to prove financial need. However, they do require you to pay the interest while you're in school and during grace periods and deferment. If you don't pay the interest during that time, it gets added to your principal loan amount after your grace period or deferment ends, costing you more over the life of the loan.
Neither type of direct loan takes credit history or income into account. You will have to pay an origination (processing) fee of 1.062% of the loan total. This rate may change after October 1, 2019. For current interest rates, see the table below.
Direct PLUS and parent PLUS loans are available to grad students and to the parents of both undergraduate and graduate students. You don't need a good credit history to get these loans. In fact, even someone with an adverse credit history may be able to obtain a PLUS loan by getting a cosigner, taking an online credit counseling program, or proving that the adverse issues were due to certain types of extenuating circumstances.
The origination fee for PLUS loans is currently just under 4.25%, and the interest rate is higher than on direct loans.
Loan limits for each type of direct loan depends on whether the student is a dependent (listed as a dependent on federal and state income tax returns or receiving substantial financial support from a parent, spouse or guardian) or independent (not listed as a dependent or not receiving substantial support). For current loan limits on federal student loans, see below.
|Year in School||Dependent Students||Independent Students||Interest Rate|
|First-Year Undergraduate Annual Loan Limit||$5,500||$3,500||5.05%|
|Second-Year Undergraduate Annual Loan Limit||$6,500||$4,500||5.05%|
|Third-Year Undergraduate and Beyond Annual Loan Limit||$7,500||$5,500||5.05%|
|Graduate Student Annual Loan Limit||Not Applicable||$20,500 (Medical Students: $40,500)||6.6%|
|Unsubsidized Aggregate Loan Limit||$31,000||Undergrads: $57,500|
|Year||Dependent Students||Independent Students||Interest Rate|
|First-Year Undergraduate Annual Loan Limit||$3,500||$3,500||5.05%|
|Second-Year Undergraduate Annual Loan Limit||$4,500||$4,500||5.05%|
|Third-Year Undergraduate and Beyond Annual Loan Limit||$5,500||$5,500||5.05%|
|Graduate Student Annual Loan Limit||Not Applicable||Not Applicable||Not Applicable|
|Subsidized Aggregate Loan Limit||$23,000||$23,000||6.06%|
|PLUS and Parent PLUS Loans|
|All Years||For both types of PLUS loans, the maximum amount is the cost of attendance, minus any other financial assistance.||Interest rate is 7.6% for both|
How to Qualify for Federal Student Loans
To qualify for federal student loans, you must first fill out the Free Application for Federal Student Aid (FAFSA), which includes providing your family's income and tax information. The FAFSA could make you eligible for other kinds of help, too, such as state need-based grants or financial aid from the college you attend.
Some other conditions must be met when applying for federal student loans, including:
- Being a U.S. citizen or an eligible non-citizen (such as a U.S. national or possessor of a permanent resident card)
- Having a valid Social Security number (in most cases)
- Showing satisfactory academic progress
- Attending school at least half-time
Schools use the FAFSA to create a financial aid package, which you'll receive in the form of an award letter. This package could include federal student loans as well as scholarships, work-study programs and grants.
Private Student Loans
Private student loan lenders generally have stricter standards for income and credit history. Each lender has its own guidelines for determining loan limits, although many will lend no more than the cost of your education (minus other financial aid you receive). However, it's worth noting that some private lenders write fairly big checks: According to U.S. News & World Report, private loans can top out at as much as $500,000.
Another difference between federal and private student loans is the way you repay them. The standard federal loan term is 10 years. Private terms vary, but could be as few as five years; they could also be longer than 10 years. Some private loans do not offer grace periods.
Note that unlike fixed-rate federal loans, a private student loan might be variable-rate. In other words, the interest could fluctuate during the life of the loan, possibly more than once a year (although some private student loans come with an interest cap). In addition, private lenders don't pay the interest on loans while you're in school or during the grace period or deferment periods the way the government does for direct subsidized federal student loans.
How Much Should I Borrow in Loans?
Read the school award letter carefully, because it may not include all costs. It may list tuition but not room and board, for example. Or it may omit the expected cost of books, supplies and fees. It's important to consider all expenses when planning how much you need to borrow each year.
For example, if you have to fly or drive a long distance to the school, remember that you may need to do this a few times a year. You may also incur class fees: Art students may need to replenish paints or sculpting materials, or chemistry class might require goggles. Factor in costs for dorm supplies (clothing detergent, shower supplies, those extra-long sheets). Allow for some spending money for treats like the occasional meal away from the dining hall or special activities like concerts and sporting events.
As a general estimate, the Consumer Financial Protection Bureau suggests not taking out more in student loans than you could earn in the first year after graduation. The U.S. Department of Labor's career search tool or its Occupational Outlook Handbook can help you determine starting salaries in your chosen field.
It may be possible to negotiate your aid package. Among other things, ask if:
- School-based aid could be renewable each year
- The school has other aid sources you could apply for
- The school will match financial aid packages offered by other colleges
Impacts on Credit
Any type of debt will have an effect on your credit reports and your credit scores. Credit scoring companies consider your payment history, debt load and the size of your monthly obligation when calculating your credit scores, so how you manage your student loan payments can have a direct effect. Even if your student loans are in deferment, the total amount you owe makes a difference. It can affect whether you'll be able to get a mortgage, vehicle loan or credit card later on.
Missing a student loan payment can have a serious impact on your credit. On-time payments make up 35% of your FICO® Score*, and a delinquency stays on your credit report for seven years.
Many people rely to some extent on student loans to get their degrees. However, the smart money is on borrowing only what you need to cover your educational expenses. This reduces the chances of starting your post-college life with overwhelming student loan payments.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.