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How Much Money Can You Take Out in Student Loans?

Matthew Frankel, CFP, The Motley Fool

You can probably borrow as much as you need to attend school.

Male college grad hugging his parents.

Image source: Getty Images.

If you or your child is about to head off to college, then I don't need to tell you that it's going to be expensive. Between tuition, housing, meals, books, lab fees, and transportation costs, the bill can get large, and fast.

If you're wondering whether you'll be able to borrow enough money to cover your financial need, relax. Between federal student loan programs and the growing private student loan industry, most borrowers can have their full financial need met. Here's a rundown of how much you can borrow through the various funding sources, along with some other important information to keep in mind throughout the student loan process.

Federal Direct Loans

Federal Direct Loans have some big advantages over student loans from private lenders. For starters, because they are guaranteed by the government, it's easy to qualify for a federal student loan and to obtain a low APR, regardless of your credit history or income.

In addition, federal student loans can qualify for Public Service Loan Forgiveness (PSLF), teacher loan forgiveness, and other federal programs designed to reduce borrowers' student debt burdens. Federal borrowers can also use income-based repayment plans like Pay As You Earn (PAYE), which caps your monthly payments at a certain percentage of your disposable income. Private student loans aren't eligible for any of these things.

Finally, federal student loans may qualify for an interest rate subsidy, meaning the government pays the interest that accrues while you're in school or in a qualified deferment (i.e., a temporary break from making student loan payments)..

The biggest downside to federal student loans is their borrowing limits, especially for undergraduate students in their first couple years of college. And the borrowing limits for the subsidized federal loans that I just mentioned are even smaller. Here's a table that shows the current annual (and aggregate) federal borrowing limits based on your year in school and whether you're considered a dependent or independent student:

Year in School

Dependent Student

Independent Student

First-Year Undergraduate

$5,500 ($3,500 subsidized)

$9,500 ($3,500 subsidized)

Second-Year Undergraduate

$6,500 ($4,500 subsidized)

$10,500 ($4,500 subsidized)

Third-Year and Beyond Undergraduate

$7,500 ($5,500 subsidized)

$12,500 ($5,500 subsidized)

Graduate or Professional

N/A

$20,500 (all unsubsidized)

Aggregate Loan Limit

$31,000 ($23,000 subsidized)

Undergraduates: $57,500 ($23,000 subsidized)

Graduate/Professional: $138,500 ($65,500 subsidized), including undergraduate loans.

Data source: studentaid.ed.gov.

Direct PLUS Loans

As you can probably gather from the chart above, federal Direct Subsidized and Unsubsidized Loans don't cover the full financial need of many borrowers. In other words, let's say you're a dependent college senior; your tuition, housing, meals, books, and other costs of attendance are likely to add up to much more than $7,500. If you don't have enough scholarships, grants, savings, and other sources of aid to make up the difference, you'll need to borrow more money.

That's where Direct PLUS Loans come in. These are federal student loans that are made to parents of dependent undergraduate students (also known as "parent PLUS loans") or directly to graduate or professional students (also known as "grad PLUS loans").

When you take out a PLUS loan, the U.S. Department of Education is the lender, but unlike federal Direct Loans, you'll need to have an acceptable credit history.

As far as borrowing limits go, PLUS loans can be made in amounts up to the school's total cost of attendance, minus any other financial aid. For example, if you're an undergraduate student, your school determines that its annual cost of attendance is $25,000, and you have $7,500 in federal student loans and a $2,500 scholarship. Your parents may be eligible to obtain a PLUS loan for as much as $15,000 in order to bridge the gap.

It's also important to point out that PLUS loans may come with some of the federal loan benefits I mentioned above. For example, PLUS loans made to students are eligible for income-based repayment plans.

One downside to PLUS loans is that because they're credit-based, they have higher qualification standards (borrowers must pass a credit check), and they have higher interest rates than other forms of federal student loans. For comparison, the interest rates on Direct Unsubsidized Loans for undergraduate and graduate students are 5.05% and 6.6%, respectively, for the 2018-2019 school year. Direct PLUS Loans carry a rate of 7.6%. There's also a loan fee that is deducted from each PLUS loan as it's disbursed, and for the 2018-2019 school year, this fee is 4.248% -- four times as much as the 1.062% loan fee charged on Direct Subsidized and Unsubsidized Loans.

Private student loans

If Direct Subsidized and Unsubsidized Loans don't cover your full financial need, another option is to tap into the private student loan market, which has grown tremendously in recent years. As with PLUS loans, many private lenders will allow borrowers to take out loans up to the full cost of attending school (although a few do have actual loan limits).

While private loans don't have the benefits of Direct loans, they can still be a great option to bridge your funding gap, especially if you (or a cosigner) have strong credit. Not only do many of the best private student lenders offer lower APRs than borrowers could obtain through PLUS loans, but many don't have any origination fees.

Think of it this way: If you need to borrow $10,000 per year for four years of school in addition to your Direct loan borrowing capacity, this translates to about $1,700 in origination fees alone if you go the PLUS route. Even if you get the same 7.6% APR from a private lender, skipping the origination fee amounts to serious cost savings.

Use federal Direct Loans first

The key takeaway is that the answer to the question "How much can I borrow?" is typically "As much as you need."

More specifically, each school publishes its estimated cost of attendance. As an example to illustrate this, here are the published figures from my alma mater.

However, it's important to be strategic about your borrowing. Exhaust all scholarship and grant opportunities first, and then tap into Direct Subsidized Loans and Unsubsidized Loans as much as you can. If that's not enough, explore your private options as well as PLUS loans to see which best meets your needs in terms of both features and cost-effectiveness.

Only borrow what you need

As a final point, just because you can borrow a certain amount doesn't mean you should. Yes, lenders will allow you to borrow up to your school's published cost of attendance, but you may not need this. For example, I didn't need to borrow money for housing and meals during college, because I worked a part-time job.

I've read disturbing reports of students who use their loan proceeds for spring break vacations, shopping sprees at the mall, and other expenses that are, frankly, awful reasons to go into more debt than necessary. Lenders send student loan funds directly to your school, but once your tuition and fees are covered, the financial aid office generally sends the rest to you. Just remember that any money you take out through student loans (especially private loans) will eventually need to be paid back with money that you earn. Borrow accordingly.

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