Student Loans: What You Need to Know
By Joe Messinger, CFP®
December 2, 2022
4 min READ
As of 2021, the current state of student loan debt in America…EVERY SECOND America’s student loans GROW by close to $3,000!
The increase in tuition is directly related to the free-flowing market of student loans. If I were in the lending business, I would love to have a loan on the books that are not able to bankrupt.
More often than not, students and parents are forced to take out student loans to help pay for their college costs. Loans come in two forms – federal and private (bank) – and no matter who you borrow the money from, you will need to repay it with interest so you need to understand the different types of loans and how they work.
Rates are set each year by the government effective July 1st for loans disbursed after that date. In 2023, rates are increasing. Remember, these increases are on loans disbursed after July 1st.
Types of Federal Loans
Federal loans typically have lower interest rates and more flexible repayment options (10 to 25 years), however, the amount you can borrow is limited.
The types of federal loans are Perkins (no longer available), Direct Subsidized Stafford and Direct Unsubsidized Stafford, Direct PLUS, and Direct Consolidation Loans.
Here are some quick facts to help you understand each…
Direct Federal Stafford Loans
The student loan nearly every family will consider is the Direct Federal Stafford loan—subsidized and unsubsidized.
| Direct Subsidized Stafford Loan: | Direct Unsubsidized Stafford Loan |
|---|---|
| Need based | Not need based |
| Available to undergrad students | Available to undergrad & graduate or professional students |
| US Department of Education pays interest while in school and during grace period & deferment. | You, not the government, pay interest while in school or defer. Interest will accumulate & be added to principal. |
| Grace period of 6 months after you leave school before repayment begins | Grace period of 6 months after you leave school before repayment begins |
| Loan fee (deducted from disbursement amount):
1.068% from 10/1/15 to 9/30/16; 1.069% from 10/1/16 to 9/30/17; 1.066% from 10/1/17 to 9/30/18; 1.062% from 10/1/18 to 9/30/19; 1.059% from 10/1/19 to 9/30/20; 1.057% from 10/1/20 to 10/1/23 |
Loan fee (deducted from disbursement amount):
1.068% from 10/1/15 to 9/30/16; 1.069% from 10/1/16 to 9/30/17; 1.066% from 10/1/17 to 9/30/18; 1.062% from 10/1/18 to 9/30/19; 1.059% from 10/1/19 to 9/30/20; 1.057% from 10/1/20 to 10/1/23 |
Both the subsidized and unsubsidized have loan limits based on your student’s grade and dependency. (Dependent students whose parents were denied a Parent PLUS loan can borrow at independent student limits.)
Here is a summary of the annual loan limits available under the Federal Stafford loan:
| Grade/Year | Dependent Student | Independent Student |
|---|---|---|
| Freshman | $5,500 (No more than $3,500 of this may be in subsidized loans.) | $9,500 (No more than $3,500 of this may be in subsidized loans.) |
| Sophomore | $6,500 (max. $4,500 subsidized) | $10,500 (max. $4,500 subsidized) |
| Junior & Beyond | $7,500 (max. $5,500 subsidized) | $12,500 (max. $5,500 subsidized) |
| Graduate/Professional Students | Not applicable | $20,500 unsubsidized only |
| Cumulative Limit | $31,000 (max. $23,000 subsidized) | $57,500 (max. $23,000 subsidized)
$138,500 for graduate or professional students (max. $65,500 subsidized loans from undergrad) |
Other Types of Federal Loans
Direct PLUS Loan:
- Available to graduate or professional students as well as to parents of dependent undergraduate students.
- Parents must be approved with a good credit history.
- Can borrow up to the total cost of attendance less financial aid.
- Repayment for graduate student is deferred until they leave school. Interest accrues and is capitalized.
- Repayment for parents may be deferred if requested.
- Loan fee (deducted from disbursement amount): 4.272% from 10/1/15-16; 4.275% from 10/1/16-17; and 4.264% from 10/1/17-18; 4.248% from 10/1/18-19; 4.236% from 10/1/19-20; and 4.228% from 10/1/20-23
Direct Consolidation Loans:
- Allows you to combine all your eligible federal loans into a single loan.
- Has a single loan servicer.
- Gives you access to additional loan repayment plans and forgiveness.
- No application fee.
- Parental loans cannot be combined with student loans.
- The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent.
More information about federal loans is available from the Federal Student Loan website.
What’s going on with interest rates?
As we said in the intro, loan rates for 2023 are increasing.
Here is a new schedule of rates for Stafford and PLUS loans:
| Federal Student Loan Types | Interest Rates | |||||||
|---|---|---|---|---|---|---|---|---|
| 7/1/15 - 7/1/16 | 7/1/16 - 7/1/17 | 7/1/17 - 7/1/18 | 7/1/18 - 7/1/19 | 7/1/19 - 7/1/20 | 7/1/20 - 7/1/21 | 7/1/21-7/1/22 | 7/1/22-7/1/23 | |
| Direct Subsidized | 4.29% | 3.76% | 4.45% | 5.05% | 4.529% | 2.75% | 3.73% | 4.99% |
| Direct Unsubsidized - Undergrad | 4.29% | 3.76% | 4.45% | 5.05% | 4.529% | 2.75% | 3.73% | 4.99% |
| Direct Unsubsidized - Grad | 5.84% | 5.31% | 6.00% | 6.60% | 6.079% | 4.3% | 5.28% | 6.54% |
| Direct PLUS | 6.84% | 6.31% | 7.00% | 7.60% | 7.079% | 5.3% | 6.28% | 7.54% |
What About Private Loans?
Private loans are made by banks and financial institutions and are the most rapidly growing section of education loans because the loan amount you can borrow is not limited.
Students and parents should only consider a private loan after they have maxed out all the federal loan money available to them. Interest rates, loan fees, and repayment terms can vary immensely.
Be careful to compare the payments you will face. Some banks will offer relatively low loan interest rates, but higher up-front fees. To compare, a 3 to 4% up-front fee equals a 1% higher interest rate.
Parents, you also need to be aware in many cases you will be required to be a co-signor on your child’s loan in order to obtain a competitive rate. Ultimately these loans could become your responsibility if your student cannot repay them. If you are not comfortable with co-signing, we recommend you have a conversation long before your child heads off to college.
Our Soap Box
After working with hundreds of families over the years, please allow us to get on our soap box. We recommend you estimate your total loan balance and resulting monthly payment for your student’s ENTIRE college career BEFORE deciding on a school.
Some Final Things to Consider
Will the monthly payment be an amount you or your student can afford? Here is a good monthly payment calculator to compare your loan options. As a rough estimate, for every $10,000 you borrow your payment will be $100 to $125 per month on the standard 10-year repayment schedule.
Your total balance should never be more than you anticipate making your first year out of college. Not sure what your student might be earning after they graduate? The Bureau of Labor Statistics has wage data on over 800 occupations to help you.
We talk so much about the student loan problem, but all the proposed solutions are reactive—after the fact—such as income based repayment, pay as you earn, Public Service Loan Forgiveness, etc.
We need to shift our way of thinking, America. We need a PROACTIVE plan to graduate on time with manageable student loan debt without robbing retirement!
Something else to consider: What if buying college was like buying a house? Check out our College Money Report™ for a more proactive planning approach.
Remember…Know before you go!
Updated: December 2022
Originally published: June 2017
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