Though we haven’t had much of a winter here in the Midwest, the subsequent season has nevertheless arrived: financial aid season. As you navigate the financial aid process and perhaps even begin to receive need-based aid packages from your colleges, you might be curious about one of the scarier forms of aid—loans.
The word itself might send a slight shiver down your spine as most of us have heard a horror story or two about students graduating with mountains of debt. It’s important to know that these anecdotes are very much the exception to the rule. With that said, different colleges approach loans in very different ways, and it’s important to analyze each financial aid package closely and communicate with admissions or financial aid representatives to make sure all of your questions get answered.
Here are a few of the most common college loans:
- Stafford Loan
Any discussion of college-related loans must begin with the Stafford Loan, which is essentially the federal government’s college loan program. Any family that files the FAFSA can obtain a Stafford Loan, and this loan is in the student’s name. Families qualifying for need-based aid can take advantage of the Subsidized version, wherein interest on the loan is deferred to a period after college; the current interest rate is 3.4 percent. Non-qualifying families can still obtain the Unsubsidized version in which interest does accrue during college; the current interest rate is 6.8 percent. Students have a six-month grace period after college before monthly payments begin, and this grace period extends through additional schooling such as medical or graduate school.
While the Stafford Loan is not right for every family, it is a manageable loan (students can borrow up to $3,500 freshman year, $4,500 sophomore year and $5,500 junior and senior years, plus an additional $2,000 of Unsubsidized money) with a modest interest rate and can be very helpful as your family seeks an affordable college payment plan. College, like an automobile or home, is a significant investment, and taking a moderate loan in order to help make that investment doable is, in the estimation of most college professionals, very reasonable and even advisable.
- Parent Loan for Undergraduate Students (PLUS)
As the name suggests, this loan is in the parent(s)’ name. You parent(s) must apply and qualify for a PLUS loan and there is no standard limit on the amount. The interest rate is currently 7.9 percent fixed. While a PLUS loan can also be very reasonable, some schools will include a large PLUS loan in a financial aid package before a family has even applied and qualified. This is a dangerous practice; before you commit to attending a specific institution, make sure you understand each component of your financial aid package.
I once worked with a student who received a package that included a $20,000 PLUS loan,leaving his family with no “out-of-pocket” cost. For this reason, the “amount due” on his package was listed as $0. Without entirely understanding the situation, the student informed me that he had received a full-ride to this school and was under the impression that he would pay nothing while in college or after graduating. In reality, the college was implicitly encouraging the family to take out $80,000 in loans. IWU does not include PLUS loans in financial aid packages, though we are happy to help you explore this as an option if you feel it might be beneficial.
- Institutional loans
Some colleges will include their own loans in financial aid packages. The current interest rate on an IWU loan is 8 percent, but you should check with each individual college to see if you have been offered or are eligible for an institution-specific loan.
While college loans may often get a bad name, it is these very loans that could enable your family to breathe easy with each monthly or semesterly payment. Don’t hesitate to contact your colleges to learn more about each specific loan and find out whether it’s right for you. Loans can sometimes seem scary at first, but in the end a loan might be one piece of the financial aid puzzle that helps make college an affordable reality for you and your family.