Explainer~What You Need to Know About Student Loans

2 little kids reading about what you need to know about students loans

What does it mean?

A loan is money that you have to repay with interest. Students may find loans included as part of their financial aid award, usually federal. There are a variety of loans available for students. The federal government is the largest source of student loans. However, students can find student loans from state governments, banks (referred to as private students loans), and colleges themselves

There are two kinds of Federal loans for students: subsidized and unsubsidized. Subsidized loans means that the federal government will pay the interest on the loans while the student is attending college. Students have to demonstrate need to be eligible for these loans.

With Unsubsidized loans, the federal government does not pay the interest and it immediately begins to accrue while the student is attending college. Unsubsidized loans are available to all students, regardless of family income and financial need. Both types of loans are offered through the Federal Direct Loan program and students must fill out the FAFSA to get access to either of these loans.

The Federal Government also offers PLUS loans to parents to help pay for their children’s undergraduate education. Parents can borrow up to the amount of the cost of attendance. Even though PLUS loans are for parents, students must complete the FAFSA for parents to actually borrow the money. The application process for PLUS loans will depend on the student’s college.

How does it affect how much you pay for college?

The answer to this question has to do with how colleges use loans in their financial aid awards. Often colleges include loans as part of the award used to meet the students need. This is bad for the student in two ways. The first is obvious, instead of receiving free money in the form of a grant or scholarship, the students are getting loans they’ll have to replay.

The second way this can affect how much you pay for college is that the loan is not available to help pay for the student’s Expected Family Contribution (EFC). If the family doesn’t have the money to meet the EFC obligation, they’ll have to take out a loan. However, since the school is listing the federal loan as part of meeting need, students will have to take out more expensive private loans to cover their EFC. Not only do private loans generally have higher interest rate, they don’t have the same repayment options as federal loans. This is why it’s critical for students to know their EFC and review their financial aid awards very carefully.

Where can you learn more?

Student Loans: Choosing a loan that’s right for you

Federal Versus Private Loans

How Do Student Loans Really Work?

How Do Student Loans Work

Why You Should Care About Student Loan Default Rates by State

Dangers of PLUS Loans

Connect with other parents figuring out how to pay for college

Join the
Facebook Group


Leave a Reply