Need a College Loan? You Need to Read This

Phones ring off the hook for the next couple of months from desperate Capistrano Unified parents regarding their loan options, now that they have chosen the college their child hopes to attend in the fall. 

This week I’ll focus on federal undergraduate student loan programs. These loans are best known for two features: low interest and deferment of payments. There are two student loan programs offered by the federal government: Stafford and Perkins.

Stafford

Stafford loans are an entitlement to undergraduate students. Currently, the total Stafford loan that can be borrowed over four years is $19,000 ($3,500 (subsidized)/2000 (unsubsidized) for freshman, $4,500 for sophomores, and $5,500 for juniors and seniors).

If there is a fifth year (or more) of undergraduate studies, then an additional $4,000 can be borrowed, increasing the total (subsidized, if qualified) Stafford loan to $23,000. The Stafford loan currently has a fixed interest rate of 6.8 percent with a 10-year payback term. The maximum amount that an undergrad may borrow is $31,000—No more than $23,000 of this amount may be in subsidized loans.

There are two varieties of Stafford loans: subsidized and unsubsidized. If a student qualifies for a subsidized Stafford, the federal government pays the interest while the student is in college (and for six months after graduation until the deferred payments begin). In contrast, the unsubsidized Stafford begins accruing interest upon disbursement of funds to the school.

The determination of a student receiving a subsidized or an unsubsidized Stafford is dependent upon the student’s financial need. If your family’s EFC (Expected Family Contribution) is higher than the COA (Cost of Attendance) then you will automatically receive an unsubsidized Stafford (if your FAFSA form was submitted correctly and on time). If your EFC is less than the COA and enough margin remains after other financial aid is taken into account, then you will qualify for the subsidized Stafford. (If you don’t know your EFC, go to www.LearnYourEFC.org.)

Perkins

The federal government also sponsors the Perkins loan program that some students receive based on exceptional financial need. Unlike the Stafford loan the Perkins is not an entitlement. Rather, it is “campus-based.” This means that it’s up to the college to determine who receives these funds. Perkins loans max out at $4,000 per year and have the lowest interest rate, 5 percent fixed, with a 10-year payback term. These are always subsidized loans.

For free seminars, WEBinars, and useful tools to help guide the college planning process, please go to GetCollegeFunding.org, and sign up for our "7 Mistakes Most Parents Make When Planning For College."