Loans for Undergraduates & Parents

Types of Loans

There are three sources for educational loans:

1. The Federal Government
2. State Governments/State Agencies
3. Private Lenders

Each of these lenders offer loans for students and parents. A student loan is a debt in the student’s name, for which the student is responsible for repaying. Parent loans are not in the student’s name, they are in the parent’s name only. The student does not have any legal obligation for repaying their parent’s loan.

Most educational loans require credit history and/or a creditworthy co-signer. Because undergraduate students don’t have as much credit history as their parents, the interest rate for educational loans is usually higher for students than for parents. A student loan with a co-signer who has good credit will lower the interest rate.

The Federal Direct Subsidized and Unsubsidized loans do not require a credit check, and they also tend to offer the lowest interest rates and most flexible repayment options compared to other student loans. Keep in mind that only those who demonstrate financial need based on their FAFSA documents will be eligible for the Direct Subsidized Loan. Direct Unsubsidized Loans do not have a need requirement; as long as you have a FAFSA on file for the respective school year, you can utilize an Unsubsidized Federal Student Loan. If you qualify for either of them, they will be included in your financial aid offer*.

Federal Parent loans require a credit check, but do not take the borrower’s credit score into consideration. To be considered credit worthy, the borrower cannot have an adverse credit history. Interest rates for parent loans are generally higher – individuals with good credit history may find better rates among other educational loans.

*Note: All 1st year, dependent, undergraduate students can borrow in total up to $5,500 in federal student loans comprised of Direct Subsidized Loans and/or Direct Unsubsidized Loans. If your aid offer is less than your full federal loan eligibility and you wish to borrow the full amount of federal loans available to you, please reach out to your financial aid counselor. 

Borrowing Limits

Most educational loans have a limit to how much you can borrow. As a borrower, you cannot take out an educational loan that exceeds the Cost of Attendance, including all other aid you may be receiving. In addition to this limit, many of the educational loans also have annual and aggregate limits for the amount you can borrow. An annual limit is the most you can borrow in any given year, while an aggregate limit is the most you can borrow over a lifetime.

Cost of Borrowing

There are several factors that contribute to the overall cost of borrowing educational loans:

• Origination Fee
• Interest Rate
• Interest Accrual

An Origination Fee is a cost that can be charged by the lender as a way to recoup some of the lender’s processing costs. The fee is charged upfront and deducted from the amount before the loan is even disbursed. Federal Government Loans charge an origination fee for both students and parents. It is less common for State Government/State Agency Loans and Private Loans to charge an origination fee.

The Interest Rate is the rate you are charged for borrowing and is usually represented as an Annual Percentage Rate such as 5% APR.  Interest rates can be fixed or variable, meaning that the rate will always stay the same (fixed) or it can change over time depending on the financial index used (variable).

Interest accrual refers to when the lender begins charging interest.  Depending on the type of loan, interest accrual will either begin on the day of disbursement (unsubsidized loan) or when the loan enters repayment (subsidized loan), usually 6 months after you leave school.

Repayment

The start date for paying back your educational loan depends on the type of loan you borrowed.

• Student loans generally go into repayment six months after the student drops below half-time enrollment.   There is a six-month grace period between enrollment and repayment during which time payments are not required.
   
• Parent loans generally begin repayment once the loan is disbursed.  However, some loan programs offer parents the option to request to defer payments until their student drops below half-time enrollment. 

  
Most loans have a 10-year repayment period.  Only Federal Loans offer lower monthly payments based on your income. 

All federal borrowers will have the opportunity to attend student loan exit counseling sessions. A list of available sessions as well as additional information about managing debt after graduation can be found at Personal Finance @ Duke.

Loan Forgiveness

Forgiveness programs for educational loans are very limited and require specific eligibility criteria.

For example, Federal Loan borrowers may receive loan forgiveness after working for a qualifying employer. Some State/State Agency Loans offer similar programs to encourage employment in certain professions. The NC Forgivable Loan is another example of a loan forgiveness program.