College Loan Borrowing Process Works

"Need" Loans vs. "Outside of Need" Loans

Today, loans are the largest form of student aid, making up 54 percent of the total aid awarded each year. Most students can expect to receive a loan as part of a financial aid package. There are two broad categories of loans, loans based on financial need and loans not based on financial need.

Loans Based on Financial Need
The federal government is the principal provider of need-based loan funds. Your award letter will list the type and amount of need-based loans.

Features of Need-Based Loans
Need-based loans usually share three distinct features:

2) Low Interest Rates

The Perkins interest rate is currently 5 percent and the Stafford interest rate is 6.8 percent* (for in-school, grace, and deferment). No credit check is required for a federal student loan.

2) Delayed Repayment

With a need-based federal student loan, no payments on principal are due until after you graduate or leave school.

3) In-School Interest Subsidy

This means the government pays the interest that accrues on the loan while you are in school and during the six-month grace period after graduation, resulting in substantial savings. Without this subsidy, either you would need to make interest payments while in school, or those payments would be added to the principal of the loan, making it a much more expensive loan.

Three Need-Based Loans
Typical need-based loans are Perkins loans, subsidized Stafford loans, and Direct loans. For loans based on financial need, the aid office will help guide you through the process.

• Perkins Loan

If you've been awarded a Perkins Loan, the Financial Aid Office sends a promissory note that must be signed and returned. Since the college already has been given its Perkins funds, it simply transfers the loan to your student account as a credit against charges.

Many lenders, including the College Board, now offer online loan applications.

• Subsidized Stafford Loan

For a Subsidized Stafford Loan, the aid office will ask you to choose a lender from a list they provide. Many lenders, including the College Board, now offer online loan applications.

Once you complete the loan application (a master promissory note) and the loan is approved, the money is sent by the lender to your school. The loan amount (minus the loan fee -- as much as four percent) will appear as a credit on your account.

• Subsidized Direct Loans

Direct loans work the same way as a Stafford except that the federal government is the lender.

Non-Need-Based Loans
These "outside of need" loans are used to help families that can't afford to pay their expected contribution from savings and current income.

Some colleges will include one or more of these loans in your award letter. When reviewing your aid, these loans should be removed and put to the side. When you calculate your family's share of costs, you may find that it is more than you can afford -- if so, it's time to consider these loans.

Features of Non-Need-Based Loans
Non-need-based loans:

1. usually have higher interest rates

2. have no in-school interest subsidy

3. may also require immediate repayment of principal

Four Non-Need-Based-Loans
The four main types of non-need-based loans are unsubsidized Stafford or unsubsidized Direct Loans for students, PLUS Loans for parents, Grad PLUS loans for graduate students, and private loans, for students or parents.

• Unsubsidized Stafford or Direct Loans

You must file a FAFSA before applying for an Unsubsidized Stafford Loan. The Student Aid Report (SAR) will show if your family has need. If so, you can take out a subsidized loan and save money on interest payments -- we recommend checking with the college to learn what application procedures to follow. You must complete the same master promissory note whether the Stafford or Direct Loan is subsidized or not. Once the loan is approved, the funds are sent to your college.

• PLUS Loans

This is a parent loan, sponsored by the federal government, that is unrelated to need. Generally, parents can borrow up to the total cost of education, minus any aid received. Many lenders, including the College Board, will provide quick pre-approval for a PLUS Loan within minutes, either online or over the phone. Once the application is completed and the loan is approved, the money is sent to the student's college.

• Grad PLUS Loans

This is a student loan for graduate students sponsored by the federal government that is unrelated to need. Generally, students can borrow up to the total cost of education, minus any aid received. Click here to apply for a quick Grad PLUS Loan pre-approval within minutes, either online or over the phone. Once the application is completed and the loan is approved, the money is sent to the student's college.

• Private or Alternative Loans

Private education loans are available to both parents and students, usually at higher interest rates than the federal loans described above. In almost all cases, a credit check and approval is required. Colleges and universities may provide a list of private loan sources.

If you are considering such a loan, the College Board offers private loans for both students and parents. You can also check with banks or other financial institutions with which you have accounts.

While not considered financial aid loans, for many families, non-need-based loans can play an important role in making college affordable, particularly for families that are unable to pay the family share from current income and savings.