Introduction to College Loans
This time of year, once families have decided where their high school seniors will attend college for the upcoming fall, a new set of questions come into play. Admissions applications and financial aid forms have been completed, but parents are often left with wondering how they will cover the balance remaining. Let's take a look at something that's commonly used to help bridge the gap of remaining cost; college loans.
Considering the rising cost of college, loans come into play more and more. These are made available through the Federal Government, private banks and credit unions and sometimes even schools themselves. It's common for families to need to utilize college loans. Students are graduating from college with over $20,000 in loan debt, on average. That's not accounting for loans that are in their parent's name.
Using Loans to Pay for College
Here are some of the more common loans that are made available to families:
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Federal Direct Loans
These loans, formerly referred to as the Stafford Loans, are loans in the student's name provided through the Federal Government. There's no application process. Students become eligible for this loan by filing a Free Application for Federal Student Aid (FAFSA).
These loans are provided in specified amounts to college students. They come in subsidized (government pays the interest) and unsubsidized (families are responsible for the interest) forms based on need as determined by the FAFSA and other financial aid forms. While a family may not qualify for subsidized Federal Direct Loans, you can't be turned away from the unsubsidized Federal Direct Loan because you make too much money or have too much in assets. This is a common misconception.
Here's a bit more info on Federal Direct Loans.
Parent PLUS Loans
Because the Federal Direct Loans have a maximum amount that can be borrowed, which is commonly not enough to cover the full remaining balance, parents are left to look into other options. One of the more common loan options is the Parent PLUS Loan.
This is another loan through the Federal Government. The difference between this loan and the Federal Direct Loan is that the Parent PLUS Loan is a loan in the parent's name, as the name of the loan would indicate. This loan is applied for on a pass/fail basis at a fixed interest rate provided by the government each new school year. Parents can apply for the maximum needed to cover any remaining balance.
Check out a previous article on common loan myths to avoid confusion when it comes to repayment of the Parent PLUS Loan.
Alternative Loans
Alternative loans are the common name for loans through private banks and credit unions. While you will find several banks that could provide a student loan, the more common lenders in this space are those like Sallie Mae, Discover, Wells Fargo, etc.
Alternative loans are applied for in the student's name. However, since students that are entering college traditionally don't have much, if any, credit history, they are often required to provide a co-signor on the loan. This is often the parent, but it can be anyone, not just those related to the student. In this way, alternative loans can be a good, well, alternative for families that have a credit-worthy co-signor that is NOT the parents.
These loans have a range of rates that institutions can provide you with before application. However, they often can't provide a specific rate for families until an application has been submitted and processed. It's not uncommon for families to see what rates they can receive through alternative lenders and then compare these to the Parent PLUS Loan rate.
While the loans through the Federal Government have standard fees and terms, these features for alternative loans can vary depending on the institution lending the money. Families will want to be aware of these fees, terms and overall fine print as they decide on which loan option is best for them.
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You can let me know as you have any questions regarding college loans. I provide a more detailed overview on the subject, including pros/cons of different loan types, overview of payment plan options and other loan options beyond those of the college variety. I also answer any specific questions a family has regarding paying for the remaining cost of college.