For many of our borrowers, getting a no co-signer student loan from Funding U is the first major financial decision that they have to do on their own. Entering the world of college financing with little to no experience with the ways financial aid, tuition, and student lending work is a daunting task for anyone, regardless of age. To help flatten the learning curve, we put together this “Cheat Sheet” for first time borrowers that breaks down important topics and defines key terms.
Important concepts & terms
Need-based financial aid is awarded through the federal government, state government or colleges based on expected financial need of the student. The federal government awards three types of need-based aid:
A Pell Grant is a subsidy provided by the US government based on a student’s Expected Family Contribution. The maximum amount for the 2019–2020 award year is $6,195.
Federal Work-Study is a type of financial aid that allows students to get campus jobs, when possible within their field of interest.
Subsidized direct student loans
A subsidized direct loan means that the department of education covers the interest you owe on the loan until you’ve graduated, as long as you are enrolled at least half time. Subsidized loans are offered to students who demonstrate a financial need (based on their EFC), and you can find much more information in our blog post comparing subsidized vs. unsubsidized loans.
Merit Based Aid
Merit-based financial aid isn’t based on financial need and doesn’t take your family’s finances into account at all. Instead, it is typically awarded based on a student’s abilities, talent or achievements related to things like academics, athletics, music or civic participation. Examples of merit-based aid include:
Scholarships come in all shapes and sizes, but most reward exceptional performance in either academics or athletics. Although increasingly, scholarships can be found for more “niche” activities such as duck calling and puppeteering. Many scholarships are local, either specific to your school, your community, or you state. Because of this, we created a state by state breakdown of scholarships and financial aid opportunities.
Forms and processes
This is a biggie. The FAFSA is the The Free Application for Federal Student Aid, and every college student, regardless of family income, should fill one out every year. In most cases, it dictates your eligibility for financial aid, and is used by your school, by private scholarship foundations, and by student lenders to verify need.
The CSS profile is a FAFSA alternative that some schools (mainly private, but some state colleges as well) use to determine financial aid. The main point of differentiation between the CSS and FAFSA is that while the FAFSA is designed to determine federal aid, the CSS is designed to help the school determine how it grants its own aid.
Types of loans
Direct subsidized loans are offered by the government to students with a financial need, and offer cost savings because the government covers the interest on your loans while you’re in school.
Direct unsubsidized loans are similarly offered by the government, but are available to all undergraduate students who are enrolled more than half time at an eligible college or university. There are limits capping the amount you are able to borrow, depending on your school year, your need, and the aggregate amount you have borrowed. Here is a helpful table listing those limits.
State Sponsored Loans
Some states sponsor loan programs for student residents, and these loans tend to be very competitive in terms of interest rates and repayment options. We’ve done our best to note any such state-sponsored programs in our state by state breakdown of financial aid resources.
Parent Plus Loans
Federal direct PLUS loans are government loans that parents can take out to help pay for a child’s college education. They have higher interest rates and fees and qualify for fewer repayment plans than federal direct subsidized and unsubsidized loans for students. Importantly some private loans offer lower interest rates than Federal Plus loans, so make sure to shop around before accepting.
Private Co-Signed Loans
Many banks and private companies offer student loans, and the vast majority of these are what’s known as “co-signed” loans, meaning you’ll need a credit worthy parent or guardian to put their credit on risk in order for you to qualify for the loan
No Co-signer Student Loans
At Funding U, we specialize in loans that students qualify for by themselves. We do this both because we want to serve the millions of American students who don’t have access to a credit worthy co-signer, and because we believe that we can make a better lending decision based on factors a student can control, rather than those they can’t. We make our decisions by attempting to measure your likelihood of graduating, your future earning potential, and your future debt obligations.
Loan and financial aid jargon
Expected Family Contribution
Often noted as “EFC,” this is the amount of money a family is expected to pay for their student’s college education each academic year. This number is derived from the information you provided in your FAFSA application, and is used by your school and other institutions to determine what level of need-based aid you may be qualified to receive.
DTI stands for Debt-to-Income, and is a calculation done by lenders to determine your creditworthiness. Lenders calculate your debt-to-income ratio by dividing your monthly debt obligations by your pre-tax, or gross, income. There are different thresholds lenders see as acceptable, depending on the type, amount, and terms of a loan. At Funding U, we don’t use a traditional DTI ratio because we understand that for most students, school is a full time job. Instead, we make a calculation for Projected Debt-to-Income based on a student’s course of study, academic performance, and projected debt obligations after graduation.
Broadly speaking, interest is the money you agree to pay back a lender in addition to the amount you borrowed (the “principal”). This amount is typically expressed as an interest rate, a percent of the principal.
- APR: APR stands for Annual Percentage Rate and is the calculated rate you will pay on your student loan on an annual basis. This calculation combines the interest rate of your loan plus any fees to give you the best estimate of what the loan will ultimately cost you. Advertised rates are always listed as APRs.
- Fixed Interest Rate: Fixed rate means that your interest rate is not subject to change over the term of your loan
- Variable Interest Rate: Variable rate means that the interest rate you’ve signed up for is subject to change over the term of your loan. Typically a variable rate loans offer lower introductory rates, with rates increasing over time.
Student loans often offer different repayment options while a student is still in school, as opposed to the more uniform terms offered once a student has graduated and entered the workforce. Remember you can always pay extra toward your student loan at any time. This will reduce your overall amount of interest paid on your loan.
- Deferred: Fully deferred payments mean that you don’t have to pay back your student loans while in school and that interest will not accrue on those loan payments while you are in school. Subsidized Direct Loans are fully deferred, for instance, while with unsubsidized loans, interest continues to accrue while you are in school
- Interest Only: Interest only repayment means you pay the interest on your loans while in school, with no obligation to repay the principal amount until after you’ve graduated. In short, you will owe the same amount when you graduate as when you signed the loan agreement.
- Minimum: Minimum payments are sometimes offered by lenders to keep students’ monthly payment obligations to a minimum. Typically, you’ll pay a nominal amount that will go towards your interest payments, but the remaining amount will continue to accrue, and upon graduation you will owe more than the amount you owed when signing your loan agreement.
The repayment period on your loan occurs after you graduate and your In-School period ends. This occurs typically Six Months after your graduation date. Your loan balance is divided into equal monthly payments. Most student loans are repaid over 10 years, however many new options exist these days for students to choose alternate repayment options. Income Based repayment plans for example adjust your payment to a set percentage of your income each month. Just keep in mind that income based repayment options may cost you more over time.
No matter which student loan options you utilize to get through school, keep in mind that by law no student loan will ever have a Prepayment penalty. You can always pay off your loan early.
Have more questions?
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