Understanding College Loans

When you’re looking for ways to pay for college, college loans can be a major tool in your toolkit. Unlike scholarships and grants, loans must be repaid after you leave college. That’s why it is important to fully understand the different types of student loans before you start college.

The major types of loans used for higher education are:

Federal Direct Subsidized Loans are available for students with financial need. Your school will base your financial need on the cost of attendance for your school and your Expected Family Contribution (EFC). Your EFC is found through completion of the Free Application for Federal Student Aid (FAFSA). The federal government pays the interest on these loans while the student is in school and no interest is charged until the student drops below a half-time course schedule or leaves school.

Federal Direct Unsubsized Loans are available for any student borrower regardless of financial need. Interest begins to accrue after funds are disbursed. You can either pay the interest while enrolled in school or you may defer payment of that interest. It is important to understand how deferring the interest will increase the balance due on this type of loan.

Federal Direct PLUS Loan for Undergraduate Students are an option for parents of a dependent student. These should be used only after the student has maxed out Direct Subsidized and/or Unsubsidized Loans. Repayment of a PLUS Loan begins 60 days after the funds are disbursed, but may be deferred until the student leaves school.

Private (or Alternative) Loans are available from private and other lenders, banks, or colleges and universities that do not rely on the federal government to guarantee their loans. The interest rate for loans are set by the lender and often will vary depending on the borrower and cosigner credit scores. If the interest rate is variable, rate changes in the future may mean higher monthly payments than originally anticipated. Students should consider and compare terms on several private loans before making a borrowing decision. Usually students and parents look at federal loans first, then private loans if more funds are needed.

In any case, students should limit the total amount they borrow, because each loan will have to be paid back in full.

Helpful Terms

Financial Aid Package

Your financial aid package, or award, is what your school offers you to help make it easier to pay your college expenses. Your award may be a mix of scholarships, grants, work-study and loans. You decide whether to accept any portion of the financial aid package. For example, you can decline the student loan. If you decide you do not need or want the loan after you’ve already borrowed, you can talk with your financial aid office about repaying the loan immediately so you won’t have any loan obligation.
Talk with your school’s financial aid office if you have any questions. It’s in your interest to know all the ways to pay for college prior to accepting your loans or other parts of your financial aid package.

Loan Principal

The amount of money you request to borrow.

Loan Interest

This is the fee you pay to use loaned money. For college loans, you usually have the choice to pay interest while you are enrolled or wait until you leave school and then pay on both interest and principal. When you wait, that triggers “capitalization” and the lender will add interest to the principal value of the loan. That means the interest grows from the day you get your loan until your grace period ends. With interest added to the amount you initially borrowed, the total amount you have to pay back will be higher.

Loan Servicer

If you borrow a federal loan, you will receive notification of the organization to which your loan is assigned. That servicer will be your contact for any questions on handling your loan. If you also borrow a private (or alternative) loan, you will work with the loan servicer you borrowed from.

Loan Disbursement

Disbursement is when loan money is sent to your school. Usually there is one disbursement per term.

Loan Grace Period

Federal loans, and some private, generally don’t require students to make payments while in school. Some will also offer a six-month grace period of no payments after the student is no longer enrolled at least half-time (drops classes, withdraws, or graduates).

Loan Repayment

Repayment is paying back your loan, including both the amount borrowed and the interest accrued. A standard repayment term for education loans is 10 years, but there are currently a number of loan repayment options that offer other options. When it is time for repayment, your loan servicer can describe your repayment options. Keep an open line of communication with your servicer, because they can help you if you need to change your payment plan later.