In order to ensure students have a chance to enroll in their dream schools, many students and their families have to apply for loans so they can afford the rising costs of college tuition and other school related expenses. Luckily, many loan options exist for both students and parents, and choosing the right loan boils down to deciding between accepting a federal or private loan.

Federal Loans

Among the most lucrative undergraduate loans, federal loans offer students and families loans with competitively low interest rates and comprehensive loan repayment options. In order to be eligible for a loan along with any type of federal, state, or institutional funding, students and families should know how to apply for a student loan. They must first fill out the Free Application for Federal Student Aid (FAFSA). While applying for student loans by filling out the FAFSA, students and parents fill out their income and tax information in order to generate a Student Aid Report (SAR). Through the SAR, schools award students financial aid packages that lists out the types and amount of federal loans that the students and parents can borrow.

The most popular undergraduate student loans option includes the Federal Direct Loan Program that includes subsidized, unsubsidized, PLUS, or consolidation loans. Typically, these direct federal loans are a part of the financial “award package” that the student receives through their university. Moreover, the current market usually dictates the interest rates of these loans—making the interest rate vary from year to year. Nevertheless, federal loans typically come with other benefits such as grace periods and loan forgiveness programs. Most federal loans come with a grace period, where students and parents do not need to start making payments to the loan until at least 6 months after the student falls below a half-time attendance. And, a loan forgiveness program essentially “forgives” a certain amount of loan debt (meaning the student or parents no longer have to repay that amount) if the student works in a certain field or community as dictated by the federal government. With these sorts of benefits in mind, the Federal Direct Loan Program includes the following types of loans:

• Direct Subsidized Loan:  With the current fixed interest rate of 4.29%, the Direct Subsidized loan is customarily administered to students and families with the most financial need as determined by federal regulations. The Direct Subsidized loan is one of the most desirable loans in the federal direct program. The federal subsidy associated with this loan means that students and parents do not need to pay the interest on the loan until after the grace period or 6 months after the student graduates or falls below half-term. Moreover, there are no penalty fees associated with trying to pay back these federal loans while the student is still attending school.
• Direct Unsubsidized Loans: Similar to subsidized loans, Direct Unsubsidized Loans have a current fixed interest rate of 4.29%. However, unlike the previous type of loan, the unsubsidized loan is typically not associated with financial need and, therefore, does not include the federal subsidy. For first time borrowers, this means that students or parents need to start making payments towards the interest from the time the loan is dispersed. Although the Direct Unsubsidized Loan has a grace period where families do not have to make payments towards the principal balance, not being aware of having to pay back the interest rate can have dire consequences for borrowers. If the interest rate is not paid over the student’s academic career, the amount in interest can accrue (add up) and capitalize (added to the principal balance). Meaning, both students and parents can meet with an unfortunate surprise when the principal balance of their loan is higher than originally borrowed.
• Direct Plus Loans: The Direct Plus Loan is a loan that is typically taken out by parents in order to help with any cost associated with attending school such as tuition, books, clothes, and food. The Direct Plus loan has a current fixed interest rate of 5.84% and is unsubsidized, meaning payments towards the interest rate must be made at all time. However, when applying for this loan, the Department of Educations checks the parent’s credit history and determines if the parent or family is eligible for this loan. If potential borrowers have trouble qualifying for this loan due to an unfavorable credit history, the borrower can find an endorser, someone with a better credit history who agrees to pay the loan if the borrower fails to do so, in order to obtain a Direct Plus Loan.
• Consolidation Loans: Also known as the process of combining all school related loans into one single loan and loan payment program. Although loan consolidation is a free process offered by the U.S. Department of Education, consolidating loans has some cost and benefits that borrowers should consider before applying for the process. First, loan consolidation typically allows the borrower to make one single, lower monthly payment in order to start paying back their loans. However, with this lower payment, borrowers also typically have to extend the life of the loan, meaning that paying back their loans may take up to 30 years and by default, have to make more payments and pay back more interest. Regardless, loan consolidation may give the borrower other loan repayment options that they may not have previously had access to, making their loan repayment more manageable and practical for some borrowers.

Once students and parents decide to take out loans that fit their budgets, first time student borrowers must complete entrance counseling before receiving their first loan disbursement. This entrance counseling is either in person or online depending on the schools’ requirements, and it aims at teaching the students their responsibilities as loan borrowers. Lastly, borrowers must sign a Master Promissory Note (MPN), a legal document where borrowers accept the terms and conditions of the loan and assume the responsibility of paying back their loan, the interest, or any fees associated with the loan in a timely manner.

Although loans are not always the first options for students or parents, knowing how to apply for a loan and the types of loans available makes it less difficult to borrow a federal loan that meets the student’s financial requirements and could make going to a dream school into a reality.