We all have been hearing that we have a major student loan problem in this country. Student loan debt has reached over 1.5 trillion dollars.
Yes, that’s trillion with a T.
For many families, student loans are part of their college funding strategy and that’s okay. A reasonable amount of student debt makes sense as an investment for a 4-year degree. The key word here is reasonable. So, what’s reasonable? Some would say to cap your student loan debt at what you anticipate your annual salary to be after graduating and starting your first job. This works for some students – those who know what they want to do. For others who are undecided when they go to college or the significant number of college students who change their major midstream, this presents problems.
I think before deciding how much debt to take out, families need to understand the types of “student” loans that are available.
You will notice that I have put quotes around the word student. I do this because when I hear the term student loan, I think this is debt that is taken out by the student and they are responsible for paying off the loans. This is not always the case when you hear about student loans.
In this post, I am going to focus on Direct student loans that ARE the responsibility of the student.
These are loans that are offered to the student by the Department of Education (Federal government) to encourage further education. As long as a student submits the Free Application for Federal Student Aid (FAFSA) they are eligible for and will be awarded Direct student loans.
A student can get a Direct student loan regardless of their family’s economic level. There are two types of Direct loans. A student can be awarded a subsidized or an unsubsidized loan or both.
What is a subsidized Direct student loan?
This is a Federal student loan where the interest on the loan is covered by the government until 6 months after college graduation. So, if the student takes out these loans each year for 4 years totaling $19,000, the total amount due at graduation is still $19,000. No interest has accrued.
Who is eligible for a subsidized Direct student loan?
Students who have demonstrated financial need are eligible for subsidized loans.
What is an unsubsidized Direct student loan?
The unsubsidized Direct loan is the same loan as the subsidized loan, except that interest starts accruing when the loan is given.
Who is eligible for an unsubsidized Direct student loan?
Any student who submits a FAFSA is eligible for an unsubsidized student loan. The student does NOT need to have demonstrated financial need to be awarded this type of loan.
What does a student have to do to get this loan?
All the student needs to do is submit the FAFSA. The college will award the loans to the student on their official financial aid award letter. If the student has been awarded subsidized and unsubsidized loans, they will be broken out. The family can decide if they want to accept both types or just one type. For example, some families only want to accept the subsidized Direct loans due to the loan being interest-free until 6 months after graduation. In this situation, the student would accept the subsidized loan and decline the unsubsidized loan.
Each year, if the student submits the FAFSA, these loans should be awarded.
How much can you take out?
Students can be awarded up to $27,000 in Direct student loans over 4 years. For most students, this is the max with certain exceptions that are not as common (e.g., an independent student). Please see the chart below that designates the maximum award each year of subsidized and unsubsidized loans. If the student does not have need-based aid eligibility, they will be awarded the full amount in unsubsidized loans. If the family has need-based aid eligibility, they will receive $3,500 in subsidized loans and $2,000 in unsubsidized loans for freshman year.
|Year||Subsidized Maximum||Total Loan Amount|
For many families, this is a key part of the college funding strategy so it’s important to understand these loans and how they are awarded.
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