Student Loans Demystified

Student Loans Demystified

September 16, 2019
  • Free Application for Federal Student Aid (FAFSA)
  • Federal Loans: Direct Subsidized, Direct Unsubsidized and Direct PLUS
  • Private Loan Options

Now that we are in September, it’s back to the books for students—which makes it a good time to study up on or review the student-loan process for those paying for their educations.

Here’s what you need to know.

FAFSA

The Free Application for Federal Student Aid (FAFSA) is the starting point most aid programs use to determine eligibility, and that includes states and colleges as well as the federal government. Completing it will give you a much better picture of the aid options available to you or your higher-ed-bound student.

We recommend that all of our clients with college students in their household fill out the FAFSA as early as possible, as many grants, loans and scholarships are granted on a first-come, first-served basis. The earliest you can file the FAFSA for the following school year is October 1 (that is, October 2019 for a student enrolling in September 2020).

Once your school receives the FAFSA, you (or your child or grandchild) will be sent an award letter from the financial aid office summarizing any scholarships and grants that you qualify for, as well as your eligibility for federal loans.

Federal Loans

There are three types of federal loans: Direct subsidized loans, direct unsubsidized loans and direct PLUS loans. Direct loans are taken out by students themselves. Direct subsidized loans don’t accrue interest while the student is in school. However, these loans are only available to financially qualified undergraduate students.

Direct unsubsidized loans have three key differences from direct subsidized loans: They are not need-based, interest does accrue while you’re in school and they can also be used to cover the costs of graduate school.

PLUS loans are available to parents of students or graduate students. However, they begin accruing interest as soon as they’re issued and typically carry higher interest rates than direct loans. For that reason, PLUS loans are our least favorite of the three options available.

Once you’ve exhausted the list of all scholarships, grants and federal loans that are available to you or your student, private loans can help fill any additional gaps.

Private Loans

Once you’ve exhausted the list of all scholarships, grants and federal loans that are available to you or your student, private loans can help fill any additional gaps.

Private loans are offered by banks and other institutions, like Sallie Mae or your university. They often come with higher interest rates, are not eligible for loan forgiveness, do not qualify for flexible repayment options and payments may start while the student is still in school. We recommend you use them only after all federal aid is spent.

But private loans do have their place. Federal loan limits are capped anywhere from $5,500 to $12,500 for undergraduates. Private loans often have a higher borrowing limit.

If you’d like to learn more about 529 plans and other college savings plans that could help reduce or eliminate the need for loans in the first place, we encourage you to read our special report on the subject, Smart Ways to Save (and Pay) for Education, or tune in to the “Get Smart: Saving and Paying for College” episode of The Adviser You Can Talk To Podcast.

We’re always happy to help if you have questions about educational costs and other financial planning needs. We recommend consulting with your financial adviser to determine the most prudent option tailored to your circumstances. Please contact us at (800) 492-6868 to learn more.


Please note: This update was prepared on Friday, September 13, 2019, prior to the market’s close.

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