As you embark on your
financial aid journey, you’ll find that there are many types of student loans, but they can be broken up into two general categories: federal and private. The William D. Ford Federal Direct Loan Program supplies federally funded loans, which have a variety of names, like direct loans, unsubsidized loans, Stafford loans, etc.
Though they have many names, their function is the essentially the same: federally funded loans help students bridge the gap between what they can afford to pay for college and what their institution costs. However, before you agree to any loans in your
financial aid package, it’s best to understand them.
Federal Direct Loans
The following loans are included under the William D. Ford Federal Direct Loan Program:
• Subsidized Loans
• Unsubsidized Loans
• PLUS Loans
• Consolidated Loans
Subsidized vs. Unsubsidized Loans
Subsidized and unsubsidized loans sound very similar, but there are differences to how these loans function. They are the same, though, in that they are both low-interest loans.
Subsidized loans are subsidized by the government while you are in school, which means the interest is paid for you while you’re enrolled. It is also covered for the six-month grace period after graduation as well as during periods of deferment, if needed.
Unsubsidized loans accrue interest while you are in school. You can either pay on this interest during college or start afterwards. Interest also accrues during the six-month grace period as well as during any deferment.
To qualify for both of these loans, you must complete the Free Application for Federal Student Aid, or
FAFSA. This form will determine your financial need, which will then be used to determine which of these loans is best for you.
Subsidized loans are reserved for students who demonstrate financial need, whereas unsubsidized loans are for anyone and everyone, regardless of need.
Some financial aid officers still refer to subsidized or unsubsidized loans as Stafford Loans. This is what they were called prior to 2010, so the term is oftentimes used interchangeably.
PLUS Loans
PLUS loans are part of the federal direct loan program but are limited to graduate and professional students (Grad PLUS loan) as well as parents of college students (Parent PLUS loan). These loans require an application in addition to filing the FAFSA.
The maximum amount that parents and grad students can borrow with a PLUS loan is the cost of attendance of their institution minus any financial aid received. For grad students, interest accrues the entire time they are enrolled as well as during the six-month grace period after graduation.
Parent PLUS loan holders must begin making payments on the loan as soon as it is paid out unless they
request a deferment. If you request a deferment, you will not need to make payments while your child is enrolled or during the six-month grace period after college; however, interest will accrue during the non-payment period.
Consolidated Loans
Finally, you can
consolidate all your loans into one as long as they are all part of the federal direct program. This enables you to make one monthly loan payment rather than multiple.
Consolidating your loans has its benefits. It typically lowers your monthly payment amount because the repayment period is extended to 30 years. Variable rates will be converted to fixed interest rates, and you may have access to different repayment plans, like the income-driven repayment plan or
Public Service Loan Forgiveness.
At the same time, consolidating your loans has its cons. Because the repayment period is extended, you will likely pay more interest over the life of the loan. You could also lose interest rate discounts, rebates, or some loan cancellation benefits associated with your loans.
Finally, consolidating your loans could make you lose progress on any plans you’re currently participating in, like
income-driven repayment or Public Service Loan Forgiveness. Before consolidating, make sure you talk with a loan expert with the U.S. Department of Education.
How Federal Direct Loans are Disbursed
If your financial aid package contains federal direct loans, your college or university will tell you how to accept them. You will also be required to complete entrance counseling, which explains how you are obligated to
repay the loan once you leave school. Then, you will need to sign a Promissory Note.
The school will then pay out your loans to your tuition, fees, room and board, or any other student expenses. If there are any remaining funds, they will be disbursed to you; however, they may only be used for other education expenses. This could include a laptop, textbooks, or other student fees.
You will receive regular updates and communication about your loan from your loan servicer.
After graduation, you will have a six-month grace period. During this time, you do not have to make monthly payments on your loan. This grace period allows you time to find a job so that you can successfully begin making monthly payments without having to defer right away.
Private Student Loans
Federal direct loans have loan limits for each year that you are enrolled. Loan limits can be found on the U.S. Department of Education’s
Subsidized vs. Unsubsidized Loan Guide.
You may find after you’ve qualified for federal direct loans that the loan limits still do not cover the cost of attendance at your college. In that case, you will need
private student loans to fund the remaining balance.
It can feel overwhelming to try and find a private student loan. Fortunately, we provide a private loan lender finder for Fastweb members. Once you find a loan that fits your needs, you can apply directly with the lender.
