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Choosing an Education Loan

The cost of an education loan is usually the most important criterion.

Featured Author:

Mark Kantrowitz

As a nationally recognized financial aid expert and publisher of Fastweb.com and FinAid.org, Mark has been called to testify before Congress about student aid on several occasions.

He has served as a guest columnist for the New York Times and the Huffington Post and has been interviewed regularly by major news outlets, including the Wall Street Journal, USA Today, MSN, CNN, NBC, ABC, CBS, CNBC and more.

Mark is the author of five books, including three about student aid. His most recent book, Secrets to Winning a Scholarship, helps families find and win scholarships. He is also on the editorial board of the Council on Law in Higher Education and the editorial board of the Journal of Student Financial Aid, a member of the board of directors of the National Scholarship Providers Association and a member of the board of trustees of the Center for Excellence in Education.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU) and holds Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU.

Follow him on Twitter at @mkant.

More articles from this author:

• Consumer Bankruptcy Attorneys Call for Return of Bankruptcy Discharge for Student Loans
• Summary of President Obama's Budget Blueprint for Federal Student Aid
• President Obama Proposes Student Aid Increases in State of the Union Address

Most families evaluate education loans based mainly on cash flow considerations:

How much money can you get to pay for college costs and/or living expenses?

How much are the monthly payments?

When do the payments start and when do they end?

What is the total cost of the loan (total payments over the life of the loan)?

Who is responsible for paying back the loan?

This article summarizes some of the key characteristics of student loans according to their impact on these considerations. While the quality of customer service may be worth considering, the cost of the loan is usually the most important criterion.

See also Fastweb’s Quick Reference Guide on Choosing a Student or Parent Loan.

Eligible Expenses and Loan Limits

Most education loans permit the borrower to use the loan funds to pay for any expenses in the official cost of attendance. The cost of attendance, sometimes called the student budget, includes tuition and fees, required books and supplies, room and board (for students enrolled at least half time) and transportation and personal expenses. Some private student loans may limit the loan to institutional charges (i.e., just tuition and fees) especially if the borrower has marginal credit.

The loan may also have annual and aggregate loan limits. The annual loan limit is the maximum amount you can borrow per year. The aggregate loan limit is the maximum amount you can borrow in total. In some cases the aggregate limit applies to just the individual loan program while in other cases the aggregate limit applies to all education debt.

For example, the Federal PLUS loan has an annual limit of the cost of attendance minus other aid received and no aggregate limit. The unsubsidized Federal Stafford loan for undergraduate students has annual limits that range from $5,500 to $7,500 for dependent students and $9,500 to $12,500 for independent students, and aggregate limits of $31,000 (dependent students) and $57,500 (independent students).

Most private and all federal education loans are school-certified, meaning that the college verifies that the student is enrolled and determines the maximum amount the student is eligible to borrow. Private student loan programs may reduce this amount based on credit criteria.

Start of Repayment

Education loans typically specify three time periods: the in-school period, the grace period and the repayment period. Most loans do not require the borrower to begin making payments while they are still in school. Some loans provide for a 6 or 9 month grace period after graduation during which the borrower is not required to begin making payments. During the repayment period, however, the borrower must make monthly payments of principal and interest or they will be considered delinquent (failure to make a payment on time) or in default (failure to make a payment for 120 days on a private student loan or 270 days on a federal education loan).

Certain federal student loans are subsidized, which means that the federal government pays the interest during the in-school period and grace period. These include the Perkins loan, which has a 9 month grace period, and the subsidized Stafford loan, which has a 6 month grace period. These loans are need-based.