Financial Answer Center
- Age-Appropriate Strategies
- The Cost
- Developing a Funding Strategy
- Investment Vehicles
- Saving Taxes
- Other Ways to Meet College Costs
- Parental Loans for Learning
- Landing Financial Aid
- Education Tax Incentives
- Federal Loans and Grants
- Worksheet: Inflation
- Worksheet: Putting It All Together
Call the Federal Student Aid Information Center at 1-800-433-3243 to request a free copy of Funding Education Beyond High School: The Guide to Federal Student Aid, which provides information on government loans and grants. You can also obtain a copy online at www.studentaid.ed.gov. Also call your state higher education agency which can give you additional information about obtaining loans and grants in your state.
What is a Pell Grant?
Federal Pell Grants are another source of financial aid to help you pay for college. Unlike loans, the money you get from Federal Pell Grants doesn’t need to be paid back. Pell Grants are usually reserved for undergraduate students.
• Federal Pell Grants, the largest source of federally funded grants, are awarded solely based on your financial need (academic grades and extra-curricular activities aren’t a factor).
• You must meet general federal student aid eligibility requirements to be eligible to receive a Pell Grant.
• The maximum Pell Grant award for the 2020-2021 academic year is $6,345
Here are some basic eligibility requirements for a Federal Pell Grant:
• You need to be eligible for federal student aid programs. All federal aid is determined by the Free Application for Federal Student Aid (FAFSA®), so be sure to submit one. General eligibility for federal aid programs includes that you have financial need, are a U.S. citizen or eligible non-citizen, are enrolled in an eligible degree or certificate program at your college or career school, and more.
• You’re an undergraduate student who’s enrolled full-time or part-time. Part-time students might not receive as much funding as full-time students, but your school can’t refuse your Pell Grant funds because you’re enrolled less than half-time.
• You might be eligible to receive a Pell Grant if you’re enrolled in a post baccalaureate teacher certification program.
What is a Stafford Loan?
Federal Stafford loans, sometimes called Direct Loans (subsidized and unsubsidized loans) are a common way to help pay for college. According the Department of Education, more than 33 million borrowers in the United States have one (or more) of these loans.
Stafford Loans are federal loans made by the government, meaning you’re borrowing directly from the U.S. Department of Education.
There are two different types of Stafford Loans (again, sometimes called Direct Loans).
• Subsidized Stafford Loan (available only to undergraduates) - Interest on a subsidized Stafford loan is paid by the government while students are in school or while loans are in deferment.
• Unsubsidized Stafford Loan (available to undergraduates and graduate students)
To further understand the world of Stafford Loans, it’s best to begin with a basic knowledge of the key terms:
• Subsidized Loan: Offered to undergrads who demonstrate financial need. Interest begins to accrue after the six-month grace period (see below) and throughout the repayment period. The federal government is responsible for paying the interest while you’re in school or during periods of deferment (when you aren’t required to make payments).
• Unsubsidized Loan: Offered to undergrads and graduate students. These loans don’t require borrowers to demonstrate financial need. Interest accrues while the student is enrolled in school, and students are responsible for paying it. Interest on an unsubsidized Stafford loan is paid by the student and any unpaid interest is added to the loan balance.
• Grace period: A set length of time (usually six months) after a student leaves school (graduates or otherwise) in which they are not required to make payments on their student loans.
Who is eligible?
Generally speaking, these loans are among the easiest to obtain because, unlike private student loans, the government doesn’t assess your credit or ability to repay them (which, for young people who are just entering the world of financial decision making, can be a positive thing).
Most students who qualify for aid are eligible for Stafford Loans. To be eligible, a borrower is required to:
• Be a U.S. citizen, national, or eligible non-citizen
• Be enrolled at least half-time in an eligible degree or certificate-granting program
• Have received a high school diploma or equivalent (like the GED)
• Not in default on any existing federal student loans
• Meet general eligibility requirements for federal student aid
For both subsidized and unsubsidized loans, the borrower’s school determines the amount that can be borrowed based on the cost of attendance and other financial aid a student receives.
Borrowing Limits and Time Limits
Here’s a breakdown of what undergraduate students can borrow, per year, in subsidized Stafford Loans:
• Up to $3,500 for their first year
• Up to $4,500 for their second year
• Up to $5,500 for their third year and beyond
• A maximum of $23,000 total
Here’s a breakdown of what undergraduate students can borrow, per year, in unsubsidized Stafford Loans:
• Up to $5,500 for their first year
• Up to $6,500 for their second year
• Up to $7,500 for their third year and beyond
• A maximum of $31,000 total
Both undergrads and graduate students can take these loans out, unlike subsidized Stafford Loans, which are only available to undergrads. Graduate students attending graduate or professional school also have higher borrowing limits ($20,500 annual for grad school, $138,500 lifetime, and $40,500 annual for medical school, $224,000 lifetime).
What is a Federal Supplemental Educational Opportunity Grant (FSEOG)?
The FSEOG Program provides need-based grants to help low-income undergraduate students finance the costs of postsecondary education. Students can receive these grants at any one of approximately 3,800 participating postsecondary institutions. When making FSEOG awards, the institution must give priority to those students with “exceptional need” (those with the lowest Expected Family Contributions, or EFCs, at the institution) and those who are also Federal Pell Grant recipients (see # 84.063, also under topical heading Federal Student Aid).
Almost $1 billion in FSEOG funding is awarded each year to approximately 1.6 million undergraduate students. The maximum grant is $4,000.
What is a Direct PLUS Loans?
Direct PLUS Loans are federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school. PLUS loans can help pay for education expenses not covered by other financial aid.
The Federal PLUS Loan is an unsubsidized federal education loan for graduate students and for parents of dependent undergraduate students. The Federal PLUS Loan, also known as a Federal Direct PLUS Loan, is available after the student exhausts eligibility for Federal Stafford Loans.
There are two versions of the Federal PLUS Loan: the Federal Parent PLUS Loan and the Federal Grad PLUS Loan.
• The Federal Parent PLUS Loan is available to parents of dependent undergraduate students
• The Federal Grad PLUS loan is available to graduate and professional school students
Other than the differences in the borrower, the purpose of the loan and some discharge provisions, the Parent PLUS and Grad PLUS loans are nearly identical. The Federal Grad PLUS Loan first became available on July 1, 2006, through an amendment to the Federal Parent PLUS Loan.
The Federal PLUS Loan is an unsubsidized loan. Interest begins accruing immediately after disbursement. The federal government does not pay the interest on the Federal PLUS Loan.
If the interest is not paid as it accrues, it will be added to the loan balance (capitalized) when the loan enters repayment. This increases the amount of debt. After interest is capitalized, interest will be charged on the interest, causing the loan to grow faster.
The Federal PLUS Loan has an annual limit equal to the college’s cost of attendance, minus other aid received. The Federal PLUS Loan does not have an aggregate loan limit. The student’s college will determine how much the parents can borrow through the Federal Parent PLUS loan or a graduate student can borrow through the Federal Grad PLUS loan.
Borrowers of the Federal PLUS Loan must not have an adverse credit history.
Otherwise, there is no requirement that a PLUS loan borrower have good credit, such as a high credit score, minimum income threshold or low debt-to-income ratio.
The credit criteria for a PLUS loan are backward-looking, considering whether the borrower has had financial difficulty in the past. The PLUS loan does not consider the borrower’s future ability to repay the debt.
As with Federal Stafford Loans, the student must be enrolled at least half-time and be making satisfactory academic progress, such as maintaining at least a 2.0 GPA on a 4.0 scale in college. Filing the Free Application for Federal Student Aid (FAFSA) is also required before the student or parent can receive any federal education loans.
Securities and insurance products are offered through Osaic Institutions, INC., Member FINRA/SIPC. Osaic Institutions, INC. and FB Wealth Management, a division of First Bank, are not affiliated. We do not provide tax advice. Consult your tax advisor.