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An Undergraduate's Complete Guide to Student Loans

Lyle Daly, The Motley Fool

Here’s everything you need to know about student loans for undergraduates.
Image source: Getty Images.

Female Student Walking Into School With Backpack Over Her Shoulder

If you’re anything like the typical undergrad, then you may have discovered that savings and financial aid won’t quite cut it when it comes to covering your college costs. Going to school isn’t exactly cheap, so for many of us, student loans are a fact of life.

Now, there are a lot of student loan options available, and they’re not all created equal. The student loans you choose will affect your repayment terms, how much you pay in interest, and much more. Simply put, applying for student loans is a major moment in your life, and it’s crucial that you pick the right loans.

In this guide, you’ll learn the ins and outs of your student loan options, including loans through the federal government and through private lenders. By the end, you’ll have a thorough understanding of the smartest ways to pay for your education.

Federal student loans for undergraduates

Federal student loans are loans issued by the federal government. Your credit score is not a factor in getting a federal student loan.

These loans have a fixed interest rate, which means that the interest rate stays the same throughout the term of the loan.

There are several benefits to federal loans that you don’t get with private loans:

  • You can apply for an income-based repayment plan to potentially get a lower monthly payment.
  • If you’re unable to make your payments, you can apply for deferment or forbearance to temporarily stop them.
  • Those on income-based repayment plans and those in public service fields can also qualify for loan forgiveness after making enough qualifying loan payments.

Only certain types of federal student loans are available to undergraduates. These are:

Direct Subsidized Loans -- The U.S. Department of Education pays the interest on your loan while you’re in school at least half-time, during the first six months after you leave school (referred to as the loan’s grace period), and when your loan is in deferment.

This type of federal loan is only available to those who demonstrate financial need. If you do, your school will determine the maximum amount you can borrow through a Direct Subsidized Loan.

Direct Unsubsidized Loans -- You pay the interest the entire time that you have this type of loan. While you can elect not to pay interest when you’re in school, the first six months after you leave school, and during deferment or forbearance, interest will still build and get added to the total loan amount.

There’s no requirement to demonstrate financial need for a Direct Unsubsidized Loan. Your school determines the maximum amount you can borrow, but this time it’s based on your cost of attendance and any additional financial aid you have.

Direct Consolidation Loans -- If you have multiple federal student loans, you can get a Direct Consolidation Loan to combine them. That way you’ll only have one payment to make. For more on this, check out our complete guide to student loan consolidation.

How much money can you borrow with federal student loans?

Although your school will ultimately determine how much you can borrow with federal student loans, the U.S. Department of Education has also put its own caps on how much students can get. These limits depend on what year you’re in at your school and whether you’re considered a dependent or an independent student (more on that below).

Here’s what the limits are as of 2019:

Year in school

Dependent

Independent (and dependent undergrads with parents who can’t get Direct PLUS Loans)

First-year

$5,500 total, $3,500 in subsidized loans

$9,500 total, $3,500 in subsidized loans

Second-year

$6,500 total, $4,500 in subsidized loans

$10,500 total, $4,500 in subsidized loans

Third-year and beyond

$7,500 total, $5,500 in subsidized loans

$12,500 total, $5,500 in subsidized student loans

Data source: U.S. Department of Education.

So let’s say that you’re a second-year, dependent undergrad who qualifies for the maximum financial aid amount. That means the U.S. Department of Education would let you borrow up to $4,500 in subsidized loans and an additional $2,000 in unsubsidized loans, for a grand total of $6,500. Your school could, however, set lower limits.

How do you know if you’re considered a dependent or independent? For financial aid purposes, you’re generally considered a dependent of your parents until you’re 24 years old. There are some exceptions, including for those who are married, a veteran, or have legal dependents of their own. The easiest way to figure this out is to review the dependency status questions on this page.

How to apply for federal student loans

To apply for federal student loans, you just need to fill out the Free Application for Federal Student Aid (FAFSA®). This application always opens Oct. 1 for the next school year and has a federal deadline of June 30, although some states set earlier deadlines. That means if you’re applying for the 2020 school year, you could fill out your application starting on Oct. 1, 2019.

You should submit your FAFSA® as early as you can, because some financial aid will be limited. With those types of financial aid, it’s first come, first served.

Your college will send you a financial aid award letter based on the information in your FAFSA®. These letters usually arrive around the end of March or the beginning of April. Your letter will include all the financial aid you qualify for, which includes:

  • Subsidized and unsubsidized loans
  • Grants
  • Scholarships
  • Work-study programs

Once you have your letter, you’re free to accept any of the financial aid options listed. You’ll then need to contact your school’s financial aid office, and they’ll explain how you can receive your aid.

Private student loans

Private student loans are loans issued by private lenders. When you apply for a private student loan, the lender will decide whether to approve you based on your financial information, including your income and credit score. Those factors also determine what kind of terms you qualify for. If you want, you can apply with a cosigner.

These loans can have either a fixed interest rate or a variable interest rate, with the latter meaning that the interest rate can increase or decrease during the loan term.

Income-based repayment and loan forgiveness are both not an option with private loans like they are with federal loans. Private lenders usually don’t offer deferment or forbearance, either, although some will in select circumstances.

How to apply for private student loans

Getting a private student loan starts by comparing what’s available through different lenders. While there are tons of private lenders out there, our student loan providers page has a list of the top options on the market.

From each lender’s site, you can use a prequalification tool to check potential loan rates. Using this tool only requires some basic info of yours, and it doesn’t affect your credit.

Once you’ve found out which lender will give you the best deal, you can apply for your loan online through the lender’s site.

How to pick the right financing options for your undergraduate degree

At this point you should have a solid grasp of what your student loan options are. From here, it’s all a matter of choosing the smartest financing options.

The first thing you should do is fill out the FAFSA® so that you can see what financial aid you qualify for. Go for grants and scholarships first, since this is money that you won’t have to pay back.

When it comes to student loans, the conventional wisdom is that you should borrow as much as possible through federal student loans first because of the advantages they have over private student loans.

Once you’ve exhausted all your grant, scholarship, and federal student loan options, then you can look into private student loans for any additional money that you need.

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