How Do Federal Student Loans Work?

Trying to figure out how to fund your college education can be overwhelming. You’ve heard that you can get loans from the federal government, but how do they work? How much money can you receive? How do you qualify for those loans? We’re going to break it all down for you.

The Types of Federal Loans.

There are three types of undergraduate loans through the federal government:
1) subsidized federal direct student loans
2) unsubsidized federal direct student loans
3) parent plus loans

With the subsidized federal direct student loan, the federal government pays the interest while you are attending school and during the six month grace period after you leave college. For the unsubsidized federal direct student loan, the interest accrues while you are attending school and you are responsible for that interest after the six month grace period after you leave school.

Anyone can qualify for the unsubsidized federal direct student loan, regardless of financial need. The student applies for the federal direct student loans and no cosigner is required.

As the name implies, the parents of the student apply for the parent plus loans.

How Much in Federal Student Loans Can I Receive?

The maximum allowed loan amounts for your undergraduate years vary based on your year of study:

• First Year of Study – Max of $5500
• Second Year of Study – Max of $6500
• Third & Fourth Years of Study – Max of $7500 each year

There is a need based portion of each of the above amounts. If you qualify for that portion based on your income, part of those max amounts become subsidized i.e., interest is paid by the government while you are in school and during the grace period after leaving college. The maximum subsidized amounts are:

• First Year of Study – Max of $3500
• Second Year of Study – Max of $4500
• Third Year of Study – Max of $5500

Note that the unsubsidized interest will start to accrue as soon as you take the loan and will grow and eventually will compound over time at the interest rate that’s designated. The same concept applies to the interest on the subsidized loan after the six month grace period. So, the amount you end up paying over time will be greater than the amount of the loan you have taken out.

How Much Can I Take Out in Parent Plus Loans?

With the parent plus loan, parents can borrow up to the cost of attendance. Because this amount can be a lot of money, it is important to understand what the ramifications are for when you have to start paying these loans back, how much your payments will be, and how those payments are going to fit your budget.

If you are trying to decide which type of loan to take out, you should note that the student loans have lower interest rates than the parent plus loans. Recently, they’ve been a little bit above 3% and the parent plus loans have been around the 5% range. Congress votes every year on these interest rates. As interest rates rise, so do the interest rates on these student and parent plus loans.

:How You Go About Getting the Federal Direct Student Loan
The first thing you need to do is fill out the federal Free Application For Student Aid (FAFSA) form. This application must be completed in order to get any federal direct student loan.

Once this application is complete, the colleges that you have been accepted to will receive the information and put together your financial aid package, which will most probably include references to the federal direct student loans. They will also break down any subsidized and unsubsidized amounts.

You then decide whether you’re going to take the loans or not. If you choose to take the federal direct student loans, you have to let the school know. You typically notify them of your decision through your student portal. You simply check off that you want to take the loan and then they will apply it to your account.

In addition, the first year you take out a federal direct student loan, you must complete entrance loan counseling online through the federal government. Why? Because the federal government wants to be sure that the student who is taking out these student loans understands what it means to take out a loan. This entrance counseling takes about 45 minutes or so. It consists of a series of passages you read, followed by questions you need to answer. Don’t worry, it’s not a test. If you don’t get the answer correct, you’ll simply go back and read the information again and then try to answer the question once more.

Once you “pass” counseling, you need to read and sign the promissory note for the loan, which says you will pay back this loan when the time comes. Again, no cosigner is required. This is strictly a student loan. Note: Although you only need to complete the Loan Counseling once, each year you take a direct student loan you do need to sign the associated promissory note.

How to Apply for the Parent Plus Loan

Applying for the parent plus loan is a bit different. Like the direct student loan, you must first complete the FAFSA and have your own parent FSA ID. But unlike the student loan, you must complete a Parent Plus Loan application. It’s not a difficult application to complete. You are asked for some information and then they will look up your credit score. It’s a relatively low threshold that your credit score has to meet in order to be approved for the federal parent plus loan.

You should apply for the parent plus loan between April-June before the student is heading off to college that fall AFTER you know which school your child will attend. You can also apply for thi loan later on as well, as you need the funds to pay for your child’s college education. Once you are approved, the information will be sent to the school. Note that you can change the requested amount, and as mentioned above, you can borrow up to the balance of the cost of attendance.

So that is how federal student loans and parent plus loans work for higher education. We hope this provides you with information to help you make an informed borrowing decision.

Looking for help with the college search and application process? We help students and families through the entire college planning journey – from search, applications and essays to interview prep, financial aid consultation and final school selection.

Contact us at info@signaturecollegecounseling.com or by phone, 845.551.6946. We work with students in person, through Zoom, over the phone, and by email.