Understanding Federal & Private Student Loans: Undergraduate and Graduate Students
Drexel University School of Education
Student loans help graduate and undergraduate students pay for college tuition and other educational expenses, but must be repaid after graduation with interest, which makes it important to choose wisely. There are two main sources of college loans in the United States: private loans (such as loans from banks), and public or federal loans (such as loans from the U.S. Department of Education).
While both help to pay for academic costs, there are important differences between private and federal student loans, such as variations in maximum student loan limits, interest rates, and other factors, which students and their families should know about.
Understanding standard student loan maximums and limitations, plus other distinctions between federal and private student loans, can help you determine what type of student loan is right for you.
How to Apply for Federal Student Loans for Undergraduate Students
While each type of government loan has its own unique requirements, the first step in the student loan application process is generally completing and submitting the FAFSA, or Free Application for Federal Student Aid, which can be done online.
Once your FAFSA form has been reviewed, you should receive a Student Aid Report (SAR) from the U.S. Department of Education, which contains the data that colleges use to award need-based aid.
There are many different options and payment plans for federal student loans, especially for undergraduate students, though eligibility criteria vary.
- standard repayment plans
- graduated repayment plans
- extended repayment plans
Like any type of loan, undergraduate college loans can have both benefits and drawbacks. Consider some of these potential pros and cons:
|Pros for Federal Loans for Undergraduates
|Cons of Federal Loans for Undergraduates
| Interest rates are fixed
|Strict limits on how much you can borrow
|Repayment plans are usually flexible
|Nonpayment could damage your credit score
|Monthly payments are limited in proportion to your monthly income
|Nonpayment could lead to wage garnishment
|Payments can sometimes be postponed
|Potentially insufficient to pay for all costs
Here are some key points to keep in mind when considering taking out government loans for college:
- Consolidation: It may be possible to merge, or consolidate, a group of student loans together into a single loan. StudentLoans.gov offers an online tool to determine whether you are a candidate for loan consolidation.
- Eligibility: There are many federal student loan eligibility criteria, such as U.S. citizenship (in most cases), demonstrable financial need, and “satisfactory academic progress.”
- Fees: Fees are taken out of your loans while you are enrolled, which means you should plan to receive a lower amount than the amount of the loan. Federal student loan fees range from 1.062% to 4.264%, except for Perkins Loans, which are fee-free.
- Interest Rates: Undergraduate student loan interest rates are fixed at 5.05% regardless of whether they are Direct Subsidized Loans or Direct Unsubsidized Loans.
- Lender Information: The Department of Education will assign a loan servicer to handle processing your loan repayments. Examples include MOHELA, Navient, and PHEAA.
- Payment Plans: Be aware that not all federal loans qualify for all types of repayment plans. For example, Direct Subsidized and Unsubsidized Loans are not eligible for Income-Sensitive Repayment Plans.
Make sure to consider yearly undergraduate loan limits when applying for federal aid. The maximum for undergraduate loans is restricted by federal loan limits of up to $9,500 for certain first-year undergraduates, $10,500 for second-year undergraduates and $12,500 for third-year and fourth-year undergraduates.
Private Student Loans for Undergraduate Students
Private loans come from companies like credit unions and banks, and are typically managed by organizations such as Sallie Mae. If you’re not eligible for federal undergraduate loans, or just need some extra help, private student loans can be a helpful way to offset extra college expenses.
While every lender has different rules and requirements, steps in the application process generally include providing your financial information, selecting a fixed or variable interest rate, and determining the right repayment option.
Though each lender differs, most companies offer several repayment plan options. To use Sallie Mae as an example again, undergraduate borrowers can choose between deferred repayment, fixed repayment, and interest repayment.
Like federal loans, private student loans for undergraduate students can have strengths and weaknesses. Here are a few to consider:
|Pros of Private Loans for Undergraduates
|Cons of Private Loans for Undergraduates
|Higher borrowing limits
|Higher and less stable interest rates
|Potential for rewards and discounts
|Not eligible for federal loan forgiveness programs
|More choice over lender
|May require cosigners
|Better rates with good credit
|Credit check requirements
Undergraduate borrowers should also consider the following points:
- Consolidation: It is usually not possible to consolidate private loans with federal loans, so if debt consolidation is on your mind, make sure to choose the right approach.
- Eligibility: While private loan requirements vary, common criteria include enrollment, U.S. citizenship, being 18 or older, and (if necessary) having a cosigner.
- Fees: As FinAid.org cautions, “A loan with a relatively low interest rate but high fees can ultimately cost more than a loan with a somewhat higher interest rate and no fees.” Fortunately, many private undergraduate loans do not charge any loan fees.
- Interest Rates: Unlike federal student loan rates, interest rates on private loans can be fixed or variable, which means they can range anywhere from around 4% to 12% or higher.
- Lender Information: You can choose between dozens of lenders, such as Citizens One, Discover, and SunTrust.
- Payment Plans: Payment plan options depend on the lender, and some are more flexible than others, so choose a private loan carefully.
Federal regulations tightly limit how much money the government can lend to undergraduate borrowers. Undergraduate loan limits tend to be higher with private lenders, with the maximum for undergraduate loans generally ranging between $75,000 and $120,000 (compared to the $57,000 limit for federal Subsidized and Unsubsidized Loans).
Federal Student Loans for Graduate Students
Federal loans aren’t just for undergraduates — graduate students can also qualify. Like the loan application process for undergraduates, the first step in the process of applying for federal aid as a graduate student is submitting your completed FAFSA to the U.S. Department of Education. The information contained on your FAFSA is used to prepare a personalized Student Aid Report (SAR), which is used to assess loan eligibility and, ultimately, issue your financial aid letter.
Graduate students may have several options for repayment plans for federal college loans. Depending on the student’s circumstances, payment plan options include extended repayment, graduated repayment, Income-Contingent Repayment (ICR), Pay As You Earn Repayment (PAYE), and standard repayment.
Pros and cons of student loans for graduates:
|Pros of Federal Loans for Graduate Students
|Cons of Federal Loans for Graduate Students
|Fixed interest rates
|Many repayment options
|You may need to take out additional loans
|Limited monthly repayments
|Possible damage to credit score
|Potential to delay some payments
|Possible wage garnishment
It’s important to be aware that a different set of loan fees, interest rates, and eligibility requirements apply to graduate federal loans and undergraduate loans. The following is specific to federal loans for graduates:
- Consolidation: Debt consolidation is an option for graduates with multiple federal loans. Discuss your options with a financial advisor before consolidating your loans.
- Eligibility: To receive federal aid, you must typically show financial need, have U.S. citizenship, and be enrolled (or accepted).
- Fees: Fees for Direct Subsidized Loans and Direct Unsubsidized Loans fluctuate over time. Currently, they range from 1.062% to 1.066%, while Direct PLUS Loan fees range from 4.248% to 4.264%. Always look to current market rates to be sure of the percentage of fees on your loans.
- Interest Rates: Currently, Direct Unsubsidized Loans for graduate borrowers have a fixed interest rate of 6.6%. Direct PLUS Loans for graduates have a fixed interest rate of 7.6%. These rates change every spring for new loans made for the upcoming year. Your loan will have a fixed interest rate for the lifetime of the loan and period of repayment, so be sure to be certain of the current rate at the time of your award.
- Lender Information: The government is the lender for both Direct PLUS Loans and Direct Unsubsidized Loans.
- Payment Plans: As discussed above, repayment plans for graduates include standard, extended, and graduated repayment.
What Is the Maximum Graduate School Loan Amount?
If your lender is the U.S. government, federal loan limits are $20,500 per year for an aggregate (combined) limit of $138,500.
Private Student Loans for Graduate Students
Like undergraduate students, graduate students can apply for private student loans. The steps in the loan application process are also similar, such as credit checks, choosing interest rates, and comparing repayment plans. However, there are some other differences graduate students should be prepared for. For example, interest rates on graduate loans are often higher.
Here are some other pros and cons of private loans for graduate students:
|Pros of Private Loans for Graduate Students
|Cons of Private Loans for Graduate Students
|Students can borrow more money
|Interest rates can be higher
|Discounts may be available
|No eligibility for federal loan forgiveness
|Many lenders to choose from
|Cosigners could be needed
|Good credit could mean lower rates
|Credit check necessary
- Consolidation: Various companies offer help refinancing or consolidating graduate student loans, such as Citizens Bank, LendKey, Sallie Mae, and SoFi.
- Eligibility: Private lenders look at eligibility factors like your credit score, your income level, and how much debt you have compared to how much money you earn.
- Fees: Many private graduate loans have zero fees.
- Interest Rates: Depending on the lender, interest rates on loans for graduate students can range up to 14% or higher.
- Lender Information: A variety of financial companies provide private student loans for graduate students, such as Discover and SunTrust.
- Payment Plans: While options range from lender to lender, potential payment plans include deferred repayment, immediate repayment, and interest-only repayment.
Private loans to graduate college students are subject to some limitations. (7) The maximum student loan amount ranges, in aggregate, from $75,000 to $120,000.
Understanding Your Financial Aid Options
Whether you’re an undergraduate or graduate student, there are a variety of Federal and private funding options to help you pay for your schooling. If you have questions or would like to learn what options are available to you, please reach out to Drexel Central for help, or look to Grants, Scholarships & Loans: What’s the Difference?