Months after submitting the Free Application for Federal Student Aid (FAFSA), families sit down to review financial aid letters. Shortly thereafter, the stress begins to build as families start to think about federal student loans. The names listed on the financial aid letter are frustratingly non-descriptive: Parent PLUS, Direct Subsidized, Direct Unsubsidized. It’s hard to know where to start. What types of loans are offered, and what are the related benefits for undergraduate students? Here’s your primer to get up-to-speed:
Direct Subsidized loans are offered to eligible undergraduate students who demonstrate financial need. In other words, these are targeted loans to make college more affordable for middle and lower income families. On these loans, interest does not accrue while you’re enrolled at least half time and for the six months after leaving school (the grace period). Importantly, the amount the student can borrow is capped at $12,500 per year for subsidized AND unsubsidized loans, but a typical range is $5,500-7,500 per year in my experience, depending on the student’s year in school. There are exceptions, but that’s the general guidance. Your financial aid letter will confirm your personal award.
Direct Unsubsidized loans are similar to Direct Subsidized loans, but interest begins to accrue when you take out the loan. Although this is the case, families shouldn’t rule this option out simply because the Department of Education doesn’t pay for the interest during school. Federal student loans, especially those offered to the student, offer historically low interest rates and other perks (see below). They are an important funding source for many families trying to pay for college, especially those with little or no savings earmarked for this life event.
As you can tell from the name, this loan option is for parents, not the student. I like to call this option a “gap loan”, because the government offers this option to families who have expenses that exceed their ability to pay for college and financial aid. This is a unique loan in that parents must pass a credit check, weeding out potential borrowers. Interest rates are higher than the aforementioned loan options, as the government is less willing to assist parents on their journey to borrow for college. You can see current interest rates on these loans here, although COVID-19 has changed this a bit.
Bottom line: are government loans beneficial for families? In many cases, yes. Of course, picking the right student loan is a personalized process, but federal loans offer clear perks including low interest rates, forgiveness opportunities, and Income Driven Repayment (IDR) plans. In many cases they don’t required a cosigner, a major difference from the private sector. Many families should consider these loans as they discuss their plan to pay for college.