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How the Borrowing Process Works

Federal loans are the largest form of student aid, making up 41% of the total aid awarded to undergraduates each year. Here's a primer on the process.

Need Loans vs. Outside-of-Need Loans

Today loans are the largest form of student aid, making up 41% of the total aid awarded to undergraduates 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 child's 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:

  • Low interest rates Stafford Loans have a fixed interest rate of 6% (unsubsidized Stafford Loans have a fixed interest rate of 6.8%) and PLUS Loans are fixed at 8.5%. The Perkins interest rate is currently 5%. No credit check is required for a federal student loan.
  • Delayed repayment With a need-based federal student loan, no payments on principal are due until after your child graduates or leaves school.
  • In-school interest subsidy This means the government pays the interest that accrues on the loan while your child is in school and during the six-month grace period after graduation, resulting in substantial savings. Without this subsidy, either your child 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 subsidized direct loans. For loans based on financial need, the aid office will help guide your child through the process.

  • Perkins Loan If your child has 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 child's student account as a credit against charges.
  • Subsidized Stafford Loan For a subsidized Stafford Loan, the aid office will ask your child to choose a lender. Many lenders offer online loan applications. Once your child completes the loan application (a master promissory note) and the loan is approved, the money is sent by the lender to your child's school. The loan amount will appear as a credit on your child's account.
  • Subsidized direct loans Direct loans work the same way as Stafford Loans except that the federal government is the lender.