I asked geg6 if she would be up for writing an “explainer” for us on student loans, and she graciously agreed. So 30 minutes or an hour from now, I expect that many of us will be smarter than we are right this minute, at least about federal student loans.
I think we’ll see what questions you guys might have, and then edit this explainer to include answers to some of those, and then we can release it in PDF form so you guys can share it far and wide. (Though maybe without all the details in the credentials that could be used to identify geg6!)
Oh, and in case you’re worried, there will not be a quiz!
Federal Student Loans: An Explainer
Before I go into the details of federal student loans, I should give a bit of my background. I’ve worked in higher education in financial aid for the last 33 years. I started at a local community college where I worked for nine years, and then got my current job as a financial aid officer at local campus of a major public research university for the last 24 years.
Here’s what I do: 1) help students complete the FAFSA (Free Application for Federal Student Aid), 2) award scholarships, 3) get parents’ and students’ loans and grants into place, 4) verify information from the FAFSA, 5) conduct special circumstance reviews and satisfactory academic progress reviews (professional judgment), 6) administer special aid programs and federal work study, and 7) other duties as assigned, such as serving on several committees for hiring, student success and diversity.
But there’s more! I am also the campus’ VA Certifying Official for students who are using VA educational benefits, a job which comes with many reporting responsibilities to the VA. In addition to all of that, I am currently the senior campus financial aid officer among the western campuses of my university, which means I am mentoring new financial aid officers at three other campuses in my region of the state.
There has been a lot of discussion of loan forgiveness lately and from what I have seen here at Balloon Juice, there is a lot of misinformation and misunderstanding of student loans.
Much of it reflects the same misinformation and misunderstandings that my students and their families have. I think it is important for those of us who are advocating for loan forgiveness to understand how these loans work so that when we run across people discussing or writing about these issues, we can know whether or not they understand the issue enough to be a credible voice for whatever position they are arguing.
So let’s start with the basics. There are four types of federal loans for education:
- Federal Direct Loan for students (subsidized)
- Federal Direct Loan for students (unsubsidized)
- Federal Direct Parent PLUS Loan
- Federal Direct Graduate PLUS Loan
For those who remember them, Federal Perkins Loans used to be a part of the mix but were phased out during the Obama administration.
FEDERAL DIRECT STUDENT LOAN OVERVIEW
Federal Direct Loans have had many names over the years (most recently, Stafford Loans but are just Direct Loans now) are in students’ names and the FAFSA is the loan application.
Source of Funds:
The funds come directly from the U.S. Department of Education and there are no banks or other financial institutions involved in the lending process.
Limits on Borrowing
Legislation limits the amounts dependent students can borrow each year and these annual borrowing limits have not changed since the 1990s.
First-year students can borrow a total of $5500/year (whether subsidized, unsubsidized or both).
That increases $1000/year until their senior year when they can only borrow the same $7500/year as juniors.
Independent students are offered an extra $4000/year in their unsubsidized loans.
Interest on these loans is capped by law, but have been historically low for the last several years as the interest is based on the annual auction of 10-year U.S. Treasury bonds plus or minus a point or two. The 2021-22 interest rate on these loans is 3.73%.
FEDERAL DIRECT STUDENT LOANS
First-year students who have been determined to have financial need based on the FAFSA can receive $3500 of their $5500 annual limit as a subsidized loan. This means the federal government pays the interest on the loan during the student’s enrollment and the 6-month grace period after graduation or stopping attendance before repayment begins. So these are essentially no interest loans during the time the student attend and the grace period.
Students who have no financial need or subsidized borrowers who need more funds to reach their annual limit will be offered unsubsidized loans up to the annual limit.
Interest will accrue on these loans as soon as they disburse and students have the choice to either let the interest accrue while they are in in-school deferment or pay the interest only as they go through school. If a student chooses not to pay the interest, the interest will be capitalized when they enter repayment after graduation.
This means that the interest that accrued will be added to the principal borrowed and, while in repayment, the student will be paying interest on interest. I always advice students and parents to pay that interest and that this is a good reason for students to have a part-time job. Paying that interest will literally save them thousands of dollars in repayment.
In addition to the annual limits, there are lifetime borrowing limits. Dependent undergrads can borrow up to $31000 and independent undergrads can borrow up to $57500. If a student wishes to make early repayment, there are no penalties for doing so.
FEDERAL DIRECT PARENT PLUS LOANS
Federal Direct Parent PLUS Loans are a parent loan and, thus, not automatically approved.
The student must have submitted a FAFSA and, ideally, the parent borrower is the parent who signed the FAFSA but that is not necessary. Only biological parents can borrow under this program.
Most schools prefer that students and parents apply for this loan online directly on the Federal Student Aid website at https://studentaid.gov/. Parents can borrow any amount up to a student’s Cost of Attendance (COA: tuition, fees, room/board, books, travel, personal expenses) as determined by the school minus any aid the student is receiving.
If the parent applies online, the approval or denial of the loan is immediate. There is a credit check, but that credit check does not include credit scoring, debt-to-income ratio or employment status.
Basically, if you pay your bills, have not declared bankruptcy and have not defaulted on a federal loan, you will be approved. Although the default on this loan is that repayment begins 30 days after full disbursement, there is an option to request deferment on the principle until after the student graduates. There is no lifetime limit.
FEDERAL DIRECT GRADUATE PLUS LOANS
Federal Direct Graduate PLUS Loans are strictly for students in graduate programs. If needed, this loan is meant to supplement the graduate level Direct Unsubsidized Loan for graduate students, which is limited to $20500/year.
Both the Parent PLUS and Graduate PLUS have a 2021-22 interest rate of 6.28%. Neither the Parent PLUS, the Grad PLUS nor the graduate level Direct Loan are expected to be a part of any loan forgiveness.
Basically, all the loan forgiveness talk is really only about the Direct Loans for undergraduates. Not only aren’t other federal loans in the discussion, but about 12% of all student loan debt is for what we call private alternative loans and cannot be forgiven by the federal government.
This is a lot, so I’ll stop for now. If you have questions, I’m happy to answer them as best I can.