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Financial Aid and College Loan Questions and Answers: Borrowing

By Peterson's Staff updated on Monday, April 07, 2014

Tell me about the Subsidized Stafford Loan.

With a subsidized college loan, the federal government pays the interest to the lender while a student is in school and during other periods when students are not required to make payments. Because the government is paying the interest during these periods, additional interest does not accrue. Once in repayment, the student is responsible for paying the interest on the loan as well as the principal amount borrowed.

To receive a Federal Subsidized Stafford Loan, need must be demonstrated under the federal need formula. In other words, when the Expected Family Contribution (EFC) is subtracted from the cost of attendance, the result must be greater than zero in order to be eligible to borrow a Federal Subsidized Stafford Loan. The determination of need and the loan amounts offered are determined by the financial aid office(s) of the college(s) the student attends. Borrowing is further limited by other aid the student is awarded, as well as the annual maximum loan limits applicable to the program.

Tell me about the Unsubsidized Stafford Loan.

Unsubsidized Stafford Loans provide assistance to students who may not demonstrate need according to the need formula but who would benefit from having access to a low-interest federal student loan program. In the case of an unsubsidized loan, that the federal government does not pay the interest on the student's behalf. Instead, all of the interest that accrues is paid throughout the life of the loan, including interest that accrues while the student is enrolled in school.

The other major difference with an unsubsidized loan is that the EFC is not considered when determining a student's eligibility. That is why unsubsidized loans are often referred to as non-need-based. The interest rate as of July 1, 2006, is 6.8 percent. Because the Department of Education subsidizes the interest on the Subsidized Stafford Loan, borrowers are not charged interest while they are enrolled at least half time, during grace and deferment periods. Borrowers of the Unsubsidized Stafford Loan are responsible to pay the interest that accrues during all periods.

How much can students borrow through these federal student loans?

The total combined amounts that may be borrowed in Subsidized and Unsubsidized Stafford Loans may not exceed the annual loan limits, which are specified in law and regulation. The maximum amounts dependent, undergraduate students may borrow in subsidized and unsubsidized Stafford loans combined effective July 1, 2007, are:

  • $3,500 per year for first-year undergraduate students
  • $4,500 per year for second-year undergraduate students
  • $5,500 per year for the remaining years of undergraduate study

 

Dependent undergraduate students may borrow an aggregate of $23,000 in subsidized and unsubsidized loans. Dependent undergraduate students whose parents do not qualify for PLUS loans may borrow an aggregate of $46,000 in Stafford loans, no more than $23,000 of which may be subsidized.

What if my parents are denied a PLUS college loan?
Effective July 1, 2007, dependent students whose parents applied for and were unable to get a Parent PLUS loan may borrow up to:

  • $7,500 for first-year students enrolled in a program of study that is at least a full academic year ($3,500 in subsidized loans and $4,000 in unsubsidized loans)
  • $8,500 for students who have completed the first year of academic study and the remainder of their program is at least a full academic year ($4,500 in subsidized loans and $4,000 in unsubsidized loans)
  • $10,500 per year for students who have completed two years of academic study and the remainder of their program is at least a full academic year ($5,500 in subsidized loans and $5,000 in unsubsidized loans)

 

What is the grace period for these federal student loans?

A grace period is the time during which borrowers do not need to begin repaying their loan. In the case of a Stafford Loan, the grace period typically encompasses the six months after the student finishes school or drops below half-time enrollment. Repayment can begin during the grace period if the borrower chooses to do so. On subsidized loans those payments will be applied directly to the principal of the loan, allowing full repayment of the loan sooner than expected. The Perkins Loan has a nine-month grace period.

Why is the Stafford Loan amount so low for incoming freshmen?

Federal regulations limit the amount students may borrow according to their educational level. These amounts are determined every five years in a process called reauthorization. Borrower loan limits increased to $3,500 from $2,625 for new loans effective on July 1, 2007. You may want to contact your U.S. Senator or congressional representative to express a need for higher limits. However, the government is aware of the need to keep borrowing to a practical minimum.

Why can freshmen have a federal college loan of only $3,500 when seniors are allowed to borrow over $5,000?
The rationale is that the federal government wants to limit the amount of debt a student is able to accrue. Once students are seniors, it is more likely that they will graduate and find jobs in their field, which will allow them to pay the loan back. Freshmen may decide that school is not for them and withdraw. If that happens, and they have been allowed to borrow a large sum of money, they may not be able to find a job that will allow them to pay it back.

My child has received a subsidized Stafford Loan for $3,500. What is the next best option to fill the gap from the EFC to cost of attendance?

After the Stafford has been taken, the next option would either be a PLUS loan for the parents, or, if you want the borrowing to be in the student's name, you can consider an alternative college loan that is available through private lenders. Your financial aid office can give you more information on these private student loans.

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Peterson's has more than 40 years of experience in higher education, and the expert staff members here are all ready to leverage their considerable knowledge and experience to help you succeed on your educational journey. We have the information, the know-how, and the tools -- now all we need is you!

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