Financial aid letters may include more money — through federal loans — than students or families need, and it's not always clear that students and parents don't need to accept the loans or the full amount of all loans.
It may seem obvious, but reducing the amount borrowed today will mean less debt after graduation. Especially since borrowers not only have to repay the original loan amount but also the interest that accrues daily on those loans. Once a loan has been accepted and the funds have been sent to the college or university, the student (or parent, in the case of a federal parent PLUS loan) is responsible for repaying it, no matter how the college journey ends.
If the federal loan amount on a student's financial aid letter seems like more than the student will need, students and parents do have the option to accept less than the offered loan amount or decline one or more loans completely. And if the financial aid and offered federal loans are not enough, private student loans and parent PLUS loans are options to fill any funding gaps.
Let's take a look at the different types of loans that are available and how to decide which ones to maximize and which to minimize or dismiss completely.
Types of Student Loans
Student loans, and education loans for parents or family members, are not all the same. Loans for college fall into two categories: loans (called federal loans) backed by the federal government and loans (called private loans) offered by private companies, like banks, credit unions and student loan–only financial institutions.
Understanding the differences between these loans and the types of each can help students and families decide which loans to accept and which to decline or reduce.
Subsidized and Unsubsidized Federal Loans
Subsidized federal loans are for students who show a financial need, and the federal government pays the interest during specific periods, such as when the student is in school. Information students provide on the FAFSA (Free Application for Federal Student Aid) each year determines if they qualify for subsidized federal loans.
Unsubsidized federal loans are an option for all students who complete the FAFSA as financial need is not considered. The student is responsible for all interest, which starts accruing at the time the loan funds are sent to the school.
For both subsidized and unsubsidized federal student loans:
- The student is responsible for repaying the loan.
- Repayment begins when the grace period ends, which is typically six months after graduation, dropping below half-time enrollment or leaving school.
- There is a loan fee of just more than 1% for federal loans that is deducted from the total loan amount before it is sent to the college or university.
Take advantage or minimize this loan? These are the best student loans to accept the full amount offered or as much as necessary, if loan funds are needed.
Private student loans are an option for students who need extra funds to cover college costs after exploring and exhausting all sources of student financial aid. Students typically need an eligible cosigner, and loan terms and offers vary by lender. Typically these loans have fewer benefits and may have higher rates than federal loans for students. The student and cosigners, if applicable, are responsible for repaying the loan. Repayment typically starts six months after the student graduates, drops below half-time enrollment or leaves school. However, programs vary, and lower rates may be offered if payments are required to be made while the student is in school. In today's market, most private loans offered to students with creditworthy cosigners do not include an upfront origination fee.
Take advantage or minimize this loan? Students should exhaust any federal loans for students before considering a private loan, only borrow what is needed and consider their ability to successfully repay these loans.
Private loans for parents are another option for families who cannot cover expected college costs after the student's financial aid is exhausted. These loans are usually available to parents, guardians and even family members. Rates for these loans will often depend on the borrower's credit score and debt-to-income levels. Not all parents will qualify for these loans, but those who need these loans want to ensure that the rates they are offered are lower than the parent PLUS loan. In today's market, most private loans offered to creditworthy parents or others do not include an upfront origination fee.
Our College Family Loan is one such private loan option — offering mostly lower fixed rates than the parent PLUS loan and no fees — for parents, family members or others who wish to help with a student's college costs. Parents, family members and others can find out what College Family Loan rate they qualify for, and if it is less than the parent PLUS loan, with no impact to their credit in less than a minute using our simple pre-qualification process.
Take advantage or minimize this loan? If additional funding is needed, borrowing through a private lender should be limited to only what is needed and borrowers should consider their ability to successfully repay these loans in the future.
Federal Parent PLUS Loans
Parent PLUS loans are federal loans for parents of undergraduate students (PLUS loans are also available for graduate or professional students). PLUS loans typically have higher interest rates than loans for undergraduate students, but applicants nearly always qualify for the loan.
For parent PLUS loans, the biological or adoptive parent (or in some cases, the stepparent) is the only one responsible for repaying the loan, and those payments start as soon as the funds are disbursed to the school. Parents can request a deferment so that payments are not required while the student is enrolled at least half time and during a grace period. There is a loan fee of more than 4% for PLUS loans that is deducted from the total loan amount before it is sent to the college or university.
Take advantage or minimize this loan? Use caution with these loans and borrow only what is needed. Keep in mind that the terms and repayment choices offered for PLUS loans are not as generous as federal loans for students. If possible, parents should try to determine if they can receive a better rate and fee combination from a private lender.
ISL Education Lending's Private Student Loans for Parents
Parent PLUS loans may appear to be part of the offered financial aid, but it is not required that parents accept the loan. These also may not be the best loan option for parents with good credit. Before accepting a parent PLUS loan, parents wishing to help a student with college costs can pre-qualify for our College Family Loan to see the rates they are eligible for and then compare those options to the parent PLUS loan.
The College Family Loan is for creditworthy parents or family members who wish to assist college students with their education expenses. The College Family Loan:
- Features lower rates than those currently available for the parent PLUS loan.
- Has no origination, prepayment or late fees.
- Offers three repayment options during the student's college years.
- Is not limited to parents, unlike the parent PLUS loan.
- Is available no matter where in the United States the student attends college or where the student or borrower lives.