What student loan options make the most sense?
We know that college is expensive, and for many individuals (including myself) and families, taking out loans is a necessity to help pay for college. We’ve heard a lot about student loans in recent weeks with updates to the original CARES Act provisions. It is an area that has many intricacies and not all student loans are the same.
If your child is a soon to be a first-time borrower, you likely have questions about student loans such as: What types of student loans are available? What options might make sense for my child?
If you’re a visual learner like me, it may be best to first break down student loans by type, and organize how they operate by the issue of the loan. View the chart below.
For most first-time borrowers, it makes sense to focus on the federal side to start, as federal student loans generally offer the most competitive interest rates and flexibility for the borrower, compared with student loans from private sources.
When sitting down with your high school senior to fill out the FAFSA, you are helping your child access federal student loans.
Federal student loans
Undergraduate student loans on the federal side can come in the form of subsidized and unsubsidized loans.
The difference between the two: The US Department of Education will pay the interest on a subsidized loan while the student is enrolled in school. These subsidized loans are only offered to undergraduate students with financial need. Unsubsidized loans on the other hand are available to all students regardless of their financial need.
Federal subsidized and unsubsidized loans can be taken out in amounts ranging from $5,500 - $7,500 per year dependent on the year that the student is in school.
For parents looking to take out additional federal loans, Parent PLUS loans are an option. These loans are taken out in the name of the parent and are generally less attractive than unsubsidized and subsidized student loans listed above. Interest rates on Parent PLUS loans are substantially higher than the interest rate on student owned federal loans, and the parent as a borrower will be subject to a credit check.
For a more in depth look at the types of federal loans available, view the chart below.
There’s a lot to digest here. If you have questions about which loans might make the most sense for your child, feel free to reach out. I’m here to help!
All the best,
Andrew Holmes, Certified College Planning Specialist™
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.
Federal Student Aid, studentaid.gov/understand-aid/types/loans/federal-vs-private.
Federal Student Aid, studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized.
Federal Student Aid, studentaid.gov/understand-aid/types/loans/plus/parent