5 Questions on Student Loans Answered

March 11, 2022
7 min read

Last updated on March 24, 2026

Key Takeaways

The reality of loans: Student loans are common and can help cover college costs when other aid or savings isn’t enough.
Loan types differ: Federal Direct Subsidized and Unsubsidized Loans have similar terms, but the key difference is when interest accrues. Subsidized loans don’t accrue interest while in school, whereas unsubsidized loans do.
Borrowing is optional: If loans are needed, federal student loans are usually the best first choice due to lower rates and flexible repayment options.
Debt matters: Keep total student debt at or below one year of expected starting salary, and minimize borrowing by saving and tracking expenses.

Student loan borrowing is a reality for many families. In fact, loans can be a helpful way to meet college expenses when grants, scholarships, or savings aren’t enough to cover the bill. As a financial aid administrator, I’ve helped families pay for college while making smart decisions about student loan borrowing.

Here are the most commonly asked questions from families and my tips to help reduce college costs.

1. Wait, why are there loans in our financial aid package?

Seems strange, I get it. Federal Direct student loans (formerly known as Stafford) are commonly seen in financial aid awards. They are considered financial aid due to their favorable interest rates and repayment terms. And there is no credit requirement. Eligibility is based on the student’s grade level and enrollment status — and in some cases, financial need. More on that later!

The institution may also offer its own loans or loans from the state. These often come with generous rates and terms, but limited pools of funds can make them scarce.

Although less common, institutions may list a parent loan on the award letter — essentially suggesting one way the family could meet remaining expenses. Unlike with federal student loans, there is no eligibility guarantee and parents must go through the credit approval process.

Don’t just look at the total amount of the financial aid package when comparing award letters.

Tip

Because loans are commonly found in the aid package, and there can be various types of loans from different sources, don’t just look at the total amount of the financial aid package when comparing award letters. Calculate the actual cost you’ll pay for each college by subtracting the grants and scholarships awarded by each school from the total cost. Then compare loans.

2. What is the difference between Federal Direct Subsidized and Federal Direct Unsubsidized Loans?

Federal Direct Subsidized and Federal Direct Unsubsidized student loans have a lot in common. They have the same interest rate, set by Congress each year, and it’s fixed for life. There is no credit requirement, but they do have maximum annual and lifetime borrowing limits. Students also have multiple repayment options to select from after they leave college. The main difference between the two is how interest accrues.

Eligibility for Federal Direct Subsidized Loans is determined by financial need. If a student is determined to have sufficient financial need, then the loan will be subsidized. This means that no interest will accrue on the loan while the student is in school or during the six-month grace period following the student’s separation date (typically their last day of class in their final semester of attendance, not to be confused with their graduation date). As long as the student remains enrolled at least half-time, the loan will qualify for an in-school deferment, a period in which no loan repayment is required. Loan repayment typically begins at the end of the six-month grace period. Subsidized loans are a wonderful borrowing tool as they do not cost the student anything while they are enrolled in school or during their grace period.
Federal Direct Unsubsidized Loans are non-need based, awarded to students who do not present sufficient financial need. This means that interest will accrue on the loan while the student is in school and during the six-month grace period following the student’s separation date. As is the case with the subsidized loan, as long as the student remains enrolled at least half-time, the unsubsidized loan will qualify for an in-school deferment, a period in which no loan repayment is required. And as is the case with the subsidized loan, repayment typically begins at the end of the six-month grace period.

Tip

Keep in mind that interest accrues on an unsubsidized loan and capitalizes, becoming part of the principal balance borrowed, upon entering repayment. If possible, it is recommended that the accrued interest be paid prior to being capitalized as this will save money over the life of the loan.

3. Do we have to take the loans?

The decision to borrow student loans ultimately rests with the student. They can accept all, accept some, or fully decline any type of loan offered in the package.

Tip

Not all loans are created equal. If you need to borrow, obviously take the best loan first. Federal student loans usually win out here. Not only because of their fixed, favorable interest rates, but due to generous rights to forbearance – an option to pause payments due to extenuating circumstances.

4. What if we need to borrow more than what’s offered in the aid package?

Parents can apply for a Federal Direct PLUS Loan even if it’s not offered or mentioned in the aid package. The FAFSA is required, and parents need to be approved based on credit. Generally speaking, the PLUS Loan is the easiest loan to be approved for as it is only looking to see if you have adverse credit. No adverse credit? Approved! Therefore, a parent can be approved even if they don’t have perfect credit or a favorable debt-to-income ratio.

In addition to the loans already offered in the award package, students and/or parents may be able to borrow private or alternative education loans to help cover remaining expenses. Although it’s important to note that if you are not approved for a PLUS Loan, then it is unlikely that you will be approved for a private loan.

Tip

Consider savings and payment plan options first since loans can be costly in the long run with interest.

5. What is the right amount to borrow?

A good rule of thumb: Keep the total borrowing amount equal to or less than one year of the student’s potential entry-level salary.

Earlier, I mentioned Federal Direct student loans and annual loan limits. The maximum amount a dependent student can borrow is $31,000, and for most graduates, that’s an acceptable amount of debt to manage (U.S. Department of Education, n.d.).

Borrowing can have benefits. It can give students a sense of responsibility to make the most of their college experience and protect their investment. And good repayment habits can help build credit.

One of the best ways to reduce overall borrowing is to save. And that’s true for both parents and students. The more money each one sets aside before college, the more options there will be to pay the bill and cover living and personal expenses.

To promote savvy spending and borrowing habits, pay attention and stay organized.

Tip

An important rule of financial management is to know what you’re spending and what you’re spending it on. To promote savvy spending and borrowing habits, pay attention and stay organized. This will help curb overspending.

A great tracking tool for federal student loans is right in your Federal Student Aid account. There you will find information about current loans, and you can use repayment estimators to see what your monthly payments could look like down the road.