If you’re helping your student decide how much debt to take on to help pay for college, it’s a good idea to plan ahead and think about their total educational costs. According to a study by Saving for College, the typical college graduate leaves school with eight to 12 different student loans, all with their own interest rates and terms. To simplify repayment—and minimize interest charges—it makes sense to encourage your student to take out fewer loans for larger amounts, especially while interest rates are low. However, they likely can’t borrow enough to cover all four years of college at once and will need to take out multiple loans. Here are three factors to consider when deciding what amount to request on a student loan application.
1. What is the school-certified cost of attendance?
When you’re thinking about financing options, most student loan lenders look at the school-certified cost of attendance, meaning the amount needed to cover your student’s tuition, room and board, textbooks, and other fees. Most schools base their cost of attendance on a full academic year rather than a single semester. Because the amount can change from year to year, you can typically only borrow enough to pay for one year’s cost of attendance. If your student borrows the minimum required to cover the cost of attendance each year, that means they’ll have at least four different loans by the time they graduate.
Related: How to Make College Worth the Cost
2. What is the lender’s loan maximum?
While some lenders allow students and parents to borrow up to 100% of the school-certified cost of attendance, others have annual maximums. For example, independent undergraduate students can only borrow up to $9,500 in federal loans per year, including a maximum of $3,500 in subsidized loans. There’s often an aggregate limit as well. For independent undergraduate students, the aggregate limit for federal loans is $57,500, and no more than $23,000 of that amount can be subsidized loans. If your student needs more than the maximum allowable amount, you may need to apply for parent PLUS loans or private student loans to cover the remaining expenses. If that's the case, you'll likely have to take out several different loans over the course of their education to pay for each academic year.
3. What are the current interest rates?
When deciding how much to borrow, keep in mind that student loan interest rates are at historic lows due to the pandemic. That seems to be a motivator for many people to go back to school; in a recent survey, 5% of respondents said that low federal loan interest rates were why they were thinking of going back to college. In May 2020, the government slashed federal student loan interest rates. For federal direct subsidized and unsubsidized loans disbursed to undergraduate students between July 1, 2020 and July 1, 2021, the interest rate is just 2.75%—the lowest interest rates have been in over 15 years. Rates are also low for private student loans. As of March 2021, variable interest rates are as low as 1.04%, and fixed interest rates are as low as 3.34%.
Interest rates on federal and private student loans won’t stay so low for long, so it makes sense to borrow more now if you anticipate needing more money for college. Taking out a single larger loan rather than multiple smaller loans allows your student to secure a lower interest and save money on interest charges over the life of the repayment term.
Save yourself and your student the trouble of taking out extra loans by encouraging them to apply for more scholarships. They can find plenty using our Scholarship Search tool!