At this point in the college timeline, families have submitted their FAFSA and gone through the verification process. Award letters have been reviewed and now families are receiving their college tuition bill. Included in the tuition bill may be federal direct student loans.
Many college bound students will need additional funds to pay their college tuition. Often, these additional funds are sourced through the government’s federal direct student loan program or the federal parent plus loan. Another option many students use is the private loan process. This article will focus only on the federal direct loan process.
Undergraduate student loans come in the form of the direct subsidized or direct unsubsidized loans. For both types of loans the school determines the amount a student can borrow based on the cost of attendance and the student’s financial aid position or Expected Family Contribution (EFC). A direct federal loan is a low-interest loan through the U.S. Department of Education and is offered to US citizen students. These loans carry a variety of benefits. The biggest benefit is payment does not begin until the student stops going to school. Some loans are interest free while the student is in school.
Both the subsidized and unsubsidized loans have fixed interest rates that change on July 1 of each year. This rate will be applied to the new amounts distributed after July 1 through June 30 of each year. The interest rate is fixed for the life of the loan. The interest rate will only change if the student consolidates the loan. If you would like more information about the 2015 – 2016 interest loans rates click here to read the blog about student loan rates.
Before any student loan can be dispersed the student must sign the digital Master Promissory Note or (MPN). This is the legal document from the U.S. Department of Education and is used by all schools and borrowers who participate in the federal loan program. Signing the MPN means the student agrees to repay the loan (s) and any accrued interest and fees used for college. The MPN must be completed in one session and usually takes only about 30 minutes. The process is not just signing the promissory note. It includes a video and test to make sure you understand the loan and financial commitment.
It will include information about the rights and responsibilities of the borrower for both the subsidized and unsubsidized loans. This Master Promissory note is a requirement for the first year of borrowing and will not be needed to be signed again for ten years.
First time federal loan borrowers also need to schedule an entrance counseling session. This can be done in-person on campus or through an interactive web site. The government does this so that the student will understand their rights and responsibilities as well as the terms of their loans. Once the student has completed in the loan counseling program it is forwarded to the school. This process is repeated at the time of graduation and is called the exit counseling.
The 2015-2016 college school year will be a little different since on May 10th of 2015 the FAFSA Pin will no longer be a valid method to signing the MPN. This year, the government instituted a new FSA ID signature process. For new college bound students they have probably already set this up. For current college bound students you had a FAFSA pin number for your previous loans. Setting up this new FSA ID is an easy process and is the step before you can sign your promissory note. If you need more information about the FSA ID you can find more details in our video and blog section where this topic is highlighted.
It is important to understand the total four-year commitment for the college tuition. When a family does this they can better allocate their resources and determine how much money is needed per year. The amount of student loan allocated to a student is different depending on their academic progress and course load. This is extremely important to understand because only a certain amount of money is available each year. If the money is not used that year it can’t be added to the total next year. The loan amounts are on per year basis for subsidized and unsubsidized loans. Listed below are dependent students loan limits:
Freshmen Year: $5,550.00
Sophomore Year: $5,550.00
Junior Year: $ 7,500.00
Senior Year: $7,500.00
Dependent students can receive $4,000.00 more in loans per year if the parent is denied a parent PLUS loan. This additional $4,000 is also available for independent students. These additional amounts are all unsubsidized which means interest will be incurred while the student is in school.
Another major advantage of the direct student loan is that they are legally the student’s financial liability. These loans also qualify for better loan repayment options than other parent loans or private loans.
Understanding the college processes can make the transition easier for both students and families. Reviewing your four-year college tuition payment allows families to better plan for the financial burden of paying for college.