The other day I answered a question on the Elearners.com forum regarding loan limits. It made me realize that with my 24 years of working in financial aid, I have achieved a knowledge base that can't reasonably be expected of students. I take this information for granted because it's my job, but I realize that the whole process is overwhelming to students and families, especially when financial aid isn't the only college issue students have to deal with. So, let's start a series of loan posts covering the basics.
There are two forms of federal student loans: Stafford Loan through the Federal Family Education Loan Program (FFELP), and Direct Lending through the U.S. government.
- Stafford Loans entail choosing a bank to process the loan and sign the Master Promissory Note. Repayment of the loan is to the lender.
- With Direct Lending, the school issues the Master Promissory Note, and repayment is made to the Department of Education. The college handles all aspects of the loan except repayment.
Your college has chosen to either go through the FFELP Stafford Loan program or Direct Lending. You have no decision in which type of loan in which to go through.
There are two types of student loans:
- Subsidized is need-based, meaning your eligibility is determined by taking your budget minus your Expected Family Contribution (determined from FAFSA) minus other financial aid. Subsidized means the government pays your interest while in school, so you are not accruing any interest while your loan is deferred as you attend school, nor do you have to make any payments.
- Unsubsidized is not need-based. You can receive the Unsubsidized loan to replace the Expected Family Contribution. Unsubsidized means you can defer payment and interest, but the interest is accruing while you are in school. You have the option to make quarterly interest payments, and I encourage you to do this if you can to avoid a higher repayment when you graduate. If you defer the interest payment, the interest is being tacked on to your principal and interest accrues on top of that.
Either way, the loan limits are the same whether Stafford Loan or Direct Lending. Loan limits are determined by class level, which is determined by your college. The loan limits for an academic year (again defined by your college) are:
- Freshman: $3500
- Sophomore: $4500
- Junior: $5500
- Senior: $5500
These are federal limits for Subsidized and Unsubsidized loans combined. A student cannot receive in excess of the limits listed above in a academic year.
If you were able to file the FAFSA as an independent student, you also have the option of taking out an additional Unsubsidized loan of $4,000 if you are a freshman or sophomore, or $5,000 if you are a junior or senior. The other exception to this is if you were required to file as a dependent student and your parent was denied a Parent Loan for Undergraduate Students (PLUS). If a dependent student's parent is denied the PLUS, the student can request the additional Unsubsidized loan at the same loan limits.
Future posts will cover calculating a student loan, interest rates, and loan limits for graduate students and other post-graduate programs.