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Types of Student Loans

News | Published: January 19, 2021

Which is best for you?

Parents and students need to learn what it means to borrow loans to pay for college and understand the impact of their options. The Federal Direct Student Loan is an entitlement to the student. The student can choose to borrow a student loan, no matter what the family income may be. The student must be a U.S. Citizen, not be in default of other federal loans, and complete the FAFSA application. Which type of loan they will be eligible for depends on the student's financial need.

There are two types of Federal Direct Loans: subsidized and unsubsidized. Students will complete one Master Promissory note application for all the years they borrow and an Entrance Counseling session online before the disbursement of funds.

Subsidized

Undergraduates with demonstrated financial need can get the subsidized version. The government pays the interest while the student is in school, in their grace period, or pausing payments through deferment. For this reason, it is best to exhaust any subsidized loans offered before taking out unsubsidized loans. Congress approved an additional $2,000; however, this amount is Unsubsidized. Depending on the award strategies, colleges may or may not include the unsubsidized portion to a student who shows need.

Unsubsidized

This loan is not based on financial need. An interest rate of 4.29% accrues while the student is in school at least part-time. The interest rate accrues but is not added to the principle until the loan goes into repayment. Students can control the loan costs by paying the interest while they are in school. The interest capitalizes and then is added to the principle before repayments begin. To help pay down the loan commitment, students should take advantage of the last opportunity to pay the offered interest before the repayment starts.

$27,000 is the maximum amount a dependent can borrow over four years. The student can borrow up to $19,000 of a subsidized loan if they have demonstrated financial need and can borrow a maximum of $5,000 if they go the fifth year.

Dependent Student Can Borrow

Freshmen Year: $3,500 Subsidized / $2,000 Unsubsidized
Sophomore Year: $4,000 Subsidized / $2,000 Unsubsidized
Junior Year: $5,500 Subsidized / $2,000 Unsubsidized
Senior Year: $5,500 Subsidized / $2,000 Unsubsidized

Federal Perkins Loan

Loans are available to undergraduates and graduates with exceptionally high financial need. Students borrow money from and repay it to their school. Depending on the college will hinge on how much of this loan is available. It is limited to a capped amount. This loan has an interest rate of 5% and a 9-month grace period before the student needs to begin repayment. An undergraduate may be eligible for up to $5500 per year. A graduate student may receive up to $8,000 per year. The schools are not required to offer this much, even if the student is eligible. Borrowers can have up to 100% of their loans canceled if they work in public service jobs such as teaching or nursing for five years.

Parent PLUS Loan

This loan is only available in the parent’s name and can be used to pay for education expenses not covered by financial aid. The fixed interest rate is 6.84%. The family must complete the FAFSA application. Repayment generally begins 60 days after the second disbursement. The borrower (parent) can defer the loan. The PLUS loan is considered a new loan each year the parent borrows. The parent will have the option to consolidate the loans into one loan. In the parents' death, the student is not responsible for paying the loan back. The parent's credit history is checked, and a signed Promissory Note is required. The parent completes one application but will need to reapply for the PLUS loan each year.

State Aid

After you have applied for federal aid, you may wish to explore Maryland State aid. Maryland Higher Education Commission offers an extensive array of financial aid programs in grants, scholarships, and other awards for students who want to further their education beyond high school. Visit mhec.maryland.gov to learn more.


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