How the Borrowing Process Works; Need Loans vs. Outside of Need Loans

How the Borrowing Process Works
Need Loans vs. Outside of Need Loans

Today, federal loans are the largest form of student aid, making up 41 percent of the total aid awarded to undergraduate students 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:

Low Interest Rates
Subsidized Stafford Loans have a fixed interest rate of 6 percent (unsubsidized Stafford Loans have a fixed interest rate of 6.8 percent) and PLUS Loans are fixed at 8.5 percent. The Perkins interest rate is currently 5 percent. 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 you graduate or leave school.
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.

Subsidized Stafford Loan
For a Subsidized Stafford Loan, the aid office will ask you to choose a lender. Many lenders 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 will appear as a credit on your account.

Subsidized Direct Loans
Direct Loans work the same way as Stafford Loans 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:

Usually have higher interest rates
Have no in-school interest subsidy
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.

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 provide 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. Many applications can be completed 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 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. You can check with banks or other financial institutions with which you have accounts.
While not considered financial aid loans, for many families, these 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.