You might have a high school student at home looking at Ivy League schools or big-name universities as their next educational step, and it's exciting to have lofty ambitions. However, reality can set in all too easily because big-name schools often come with big-ticket prices.
Some students might receive a great financial aid package that covers most of their educational costs due to their academic, athletic, or artistic capabilities. Other students might have parents who can afford college, or who have saved money through a tax-advantaged 529 savings plan.
For most students though, attending college usually involves borrowing money through federal or private student loan programs. While loans offer the advantage of helping meet educational goals, taking on too much debt can have negative financial consequences in the long-term.
Before you decide how to proceed, it's important to pay attention to federal student loan limits and decide whether you need to supplement with private student loans.
Federal Student Loan Limits
There are two types of student loans available—federal and private. It's usually best to maximize the amount of money borrowed through federal student loans first before turning to private lenders.
Realize, too, that the Perkins Loan Program has been discontinued, as of 2017. So, if you've been hoping to take advantage of this program, it's no longer available and you'll need to look elsewhere.
Federal student loans are available to all students that meet the requirements, regardless of credit or income. This makes them extremely easy to obtain and is one of the reasons that they are so popular for college funding.
Undergraduate students can borrow up to $5,500 in their first year of college, $6,500 in their second year, and then $7,500 in their third year of attendance and beyond.
There are two types of undergraduate student loans available:
These loans are based on need, and the government covers the interest involved. For students who qualify, up to $3,500 of the total borrowed in the first year of college can be subsidized, with up to $4,500 subsidized in the second year and up to $5,500 in the following years.
Anyone can take out these loans, regardless of the level of need. However, interest begins accruing on the amount borrowed immediately.
There is a lifetime cap of $31,000 on federal student loans for undergraduates, and no more than $23,000 of the total can be subsidized.
There are no subsidized loans for graduate students, but they can receive up to $20,500 each year in Direct Unsubsidized Loans. Graduate students may be eligible to borrow the remainder of their college costs in Direct PLUS Loans, subject to the satisfactory completion of a credit check.
For graduate federal student loans, the lifetime limit is $138,000. It's important to note that this lifetime limit also includes the loans received for undergraduate study.
If your child still needs help covering the college funding gap, it's possible for you to borrow money through PLUS Loans to cover the remainder of college costs that are not covered by other financial aid. You do need to complete a credit check that shows no adverse items.
Private Student Loans
Another way to get the funding you need, if you run out of federal student loan options, is to get private student loans.
Keep in mind, though, that private lenders have different, potentially higher interest rates and different payment terms that can affect long-term financial liquidity.
Depending on your situation, though, they can actually be a better option than PLUS loans. If you have good credit and can qualify for a lower interest rate, a private student loan can be a reasonable choice. Carefully consider your options, though, and realize that, in many cases, private lenders require students to have cosigners with good credit.
How Much Money You Should Borrow
This is often a very personal question to answer, and one that has to be carefully considered by each family. Try not to mix the emotion of wanting to attend a particular college with the reality of the ability to pay for it. Keep the following factors in mind when deciding how much money to borrow through student loans.
How Much Will You Borrow in Total?
Find out how long it takes most students to get an undergraduate degree from the college under consideration, and then determine if your student needs a graduate degree to enter a particular profession. This should give you a rough idea of how much you will need to borrow over the four to ten years, or more, that it can take to complete an education.
Also, pay attention to items like scholarships, 529 savings, and whether your student can work during school to help reduce how much they need to borrow.
How Much Will You Have to Repay?
The federal government provides a repayment estimator that will give you a good idea of the monthly payments that will be required after graduation.
Remember that you'll have to pay interest, and the longer you have the debt, the more you'll end up paying overall. With subsidized loans, the student gets a break on the interest for a short period of time, but once they are out of school, those costs start adding up.
Who Will Make the Payments?
Some parents are happy to take on student loans, while others want their students to assume the responsibility. Compare the estimated payments against the expected salary of whoever is repaying the loans.
Is it Worth It?
If the estimated payments will cause a financial strain, the family has to consider its options. The student may want to attend a lower-cost community college to complete their lower-division or general education requirements and then transfer to a university, or attend another college completely. The family can also pull together to earn additional money, or the student can intensify the search for scholarships to locate additional funding.
How to Apply for Federal Student Loans
If you decide that federal student loans are needed to help cover the cost of college, you need to fill out the Free Application for Federal Student Aid (FAFSA). The information from the FAFSA will be sent to the schools on your list and they will use the information to put together a financial aid package.
The package will likely consist of federal loans, any scholarship money awarded to your student, grant money, if available (depending on your student's specific qualifications), and a certain amount to be earned through on-campus employment for the student.
Once you receive the financial aid package, you'll have an idea of what you need to cover with private student loans or other sources of college funding.
In the end, it's important to understand what matters most to your family, and how much debt your student can afford to have as a result of their education.