Understanding Student Loan Options - INvestEd Skip to content

When looking at your options to pay for college, you may have to decide if you’ll use education loans for part of the funding. Loans are one option available to pay for the cost of education, but remember, they must be paid back!

Having a firm understanding of your student loan options is a critical step in the paying for college process. Below are the loan options that you may come across, and a brief description of who would be eligible and how to apply. We’ve also created the Student Loan Comparison Worksheet to help see all the loan info in one place.

INvestEd is here to help Hoosier families understand the various loan options, which can lead to smarter choices!

Federal Student Loans

Federal Direct Loans

Federal direct loans are the common starting point for most students. Money is solely in the student’s name and borrowed directly from the federal government. These loans are typically the most cost effective loans available for students. However, as with any loan, there are some key costs and factors to consider:

  • Loans may be subsidized (government pays the interest for students while enrolled at least half-time), unsubsidized (interest begins to accumulate immediately if not paid), or a combination of the two.
  • Loan amounts are limited based on grade level and an overall total limit.
  • Interest rate is fixed for the life of the loan and goes into effect each July 1st.
  • A fee of just over 1% is taken off the loan so students don’t receive the full amount. Fees are determined yearly and go into effect on October 1st.

Get additional information on the Federal Direct Loan Program on the Federal Student Aid website.

In order for a student to qualify for this loan, there are four steps to complete:

  1. File a Free Application for Federal Student Aid (FAFSA) and not be in default on any previous federal loans.
  2. Enroll in college at least half time.
  3. Complete loan entrance counseling to ensure you understand the obligation to repay the loan.
  4. Sign a Master Promissory Note (MPN) agreeing to the terms and accepting the loan.

Federal Perkins Loans

Perkins is a federal loan program where the school is the lender. The loan is a need-based program so the school looks at a student’s Expected Family Contribution (EFC) from the FAFSA to see who is eligible. Not all schools participate in the Perkins loan program and funding is limited, so students will want to check with the financial aid office at each school about this loan option.

Read more about the Perkins Loan Program.

Federal Direct PLUS Loans

The PLUS (Parent Loan for Undergraduate Students) is a loan for parents borrowed directly from the federal government. A parent could borrow up to the total cost of the school their child is attending. INvestEd urges parents to consider the following factors before determining whether to take on this debt to cover student costs:

  • Loan is in parent’s name and cannot be passed on to the student.
  • Interest rate is fixed for the life of the loan and goes into effect each July 1st.
  • A fee of over 4% is taken off the loan, so the full amount is not available to cover costs. Fees are determined yearly and go into effect on October 1st.
  • Loan amount is determined by cost of the school minus other financial aid received.
  • Repayment begins once the loan is fully paid out, but the parent can postpone payments while the student is enrolled.
  • Interest does grow on the loan immediately, but interest only payments can be made.

Learn more about the Federal PLUS Loan Program.

In order for a parent to qualify for this loan, there are three steps to complete:

  1. The student must file a Free Application for Federal Student Aid (FAFSA). Student and parent cannot be in default on any federal student loans.
  2. Complete a PLUS loan application per the school’s instructions and the government will look for adverse credit.
  3. If approved, sign a Master Promissory Note (MPN) agreeing to the terms and accepting the loan.

Private Loans

Private loans are another possible source of paying for college provided by banks and not-for-profit organizations. Although this is often a student’s loan, a cosigner with income and good credit history is typically needed. The loan terms vary based on lender and loan program so INvestEd encourages families considering private loans to shop around and find the loan that meets your needs. Here are some factors to consider:

  • Loan is often in student and cosigner’s name so two people are obligated for the loan.
  • Interest rate can be variable or fixed depending on the lender and loan program.
  • Private loans typically have no fees.
  • Various repayment options ranging from immediate, interest only, or deferred.
  • Length of loan term can also vary based on lender and loan program.
  • Loan amount limited to cost of school minus other financial aid received, as well as lender’s review of student and cosigner’s credit history.

No matter which loan program a family is considering to help pay college costs, we’re here to help. INvestEd has a Student Loan Comparison worksheet to help in understanding loan options.