The cost of attending college continues to rise, and for many students, paying for their education requires borrowing. A variety of federal student loans are available through the U.S. Department of Education, while private loans are offered by banks and other lenders. Each loan comes with a different set of parameters and qualifications that dictate whether and how much students can borrow.
“It’s important to understand the type of loans you’re taking out,” says Jan Miller, president of Miller Student Loan Consulting, adding that students should also consider the long-term implications of their loans. “There are many varieties of student loans, and each has a different impact and problem they’re going to create for you once you enter into repayment.”
What Is the Maximum Amount I Can Borrow Overall?
Regardless of the type or number of loans a student takes out, the maximum annual loan amount is capped at the cost of attendance, or COA, at the student’s college or university. For two-year and four-year universities, the COA includes the total cost of tuition, fees and related expenses like on-campus room and board for both the fall and spring semesters of one school year. These are known as “direct costs” and can typically be found on the school’s website.
It can also include “indirect costs” and estimates of other expenses that students will likely incur but aren’t paying directly to the school, like textbooks and off-campus living and transportation, says Karen McCarthy, vice president of public policy and federal relations for the National Association of Student Financial Aid Administrators.
The maximum amount that undergraduate students can borrow each year in federal direct subsidized and unsubsidized loans ranges from $5,500 to $12,500 per year, depending on their year in school and whether they’re a dependent or independent student. This is determined from information provided on the Free Application for Federal Student Aid, or FAFSA, which students are required to submit each year to be considered for federal and some other sources of financial aid. Graduate and professional students can borrow up to $20,500 in direct unsubsidized loans each academic year.
There are also maximum total amounts students can borrow over the course of their undergraduate education, known as “aggregate totals.” Dependent students can borrow up to $31,000 in subsidized and unsubsidized student loans, with no more than $23,000 of the total in subsidized loans. Independent students can borrow up to $57,500 with the same cap on subsidized loans.
Pell Grants, which are awarded to undergraduate students who demonstrate exceptional financial need on the FAFSA, are another option. Amounts change yearly, but for the 2022-2023 school year, the maximum federal Pell Grant award was $6,895.
The financial information reported on the FAFSA is used to calculate the expected family contribution, or EFC, which determines how much of the COA families can pay and how much students are eligible to receive in federal student aid.
The EFC will soon be replaced by the Student Aid Index, or SAI. The new need analysis formula removes the number of family members in college from the calculation and will allow for a negative SAI (up to -$1,500) for the neediest students, according to the federal StudentAid.gov website.
The changes take effect starting with the 2024-2025 academic year.
At schools where COA is particularly high, it’s possible that students will take out private loans to cover what federal loans and other financial aid don’t, McCarthy says. Some colleges try to avoid loans altogether, instead meeting full financial need by replacing federal loans with scholarships, grants and work-study opportunities, which may help students graduate debt free.
While students can’t borrow more than the cost of attendance, they might not always need to borrow the maximum amount allotted, she says. The COA typically includes average expenses for indirect costs, and financially conscious students might be able to get by with spending less than the average. The less you borrow, the less you’ll have to repay.
“We always encourage people to take a look at some of those indirect expenses so that you’re not simply accepting the maximum amount, and then you may be borrowing more than you actually need,” she says.
Federal Direct Subsidized Loan Limits
Federal direct subsidized loans are available to eligible undergraduate students who demonstrate financial need. With these loans, the Education Department pays the interest while students are in school at least half time, as well as during the six-month grace period after they leave school and during periods of deferment.
“You may be eligible for direct subsidized loans if your EFC (or SAI in the future) identifies that you have qualifying financial need,” Meghan Lustig, director of operations and development for the Education Finance Council, wrote for U.S. News in 2021. “Your school will determine the amount you can borrow, but the amount cannot exceed your financial need.”
Here’s how much both dependent and independent undergraduate students can borrow in direct subsidized loans:
— First year: $3,500
— Second year: $4,500
— Third year and beyond: $5,500
— Total limit: $23,000
“Students should borrow federal loans first because they tend to have better borrower benefits, income-driven repayment plans and all of those types of supports during repayment that private loans generally don’t have,” McCarthy says.
Federal Direct Unsubsidized Loan Limits
Federal direct unsubsidized loans are available to undergraduate and graduate students and don’t require students to demonstrate financial need. These loans accrue interest while students are in school and during periods of deferment, with the exception of the current forbearance period brought on by the COVID-19 pandemic, which is set to expire on June 30, 2023.
The amount of direct unsubsidized loans that students may be eligible to receive is determined by their year in school and status as either a dependent or independent student. The annual maximum amount increases each year, and independent students can borrow more than dependent students. Borrowers can refer to the chart on StudentAid.gov to see how this breaks down.
“It’s important to note that there are exceptions to limits on unsubsidized loans for dependent students whose parents are determined ineligible for Parent PLUS loans,” Lustig wrote. “Such students may be able to borrow up to the unsubsidized loan limits for independent students.”
Federal PLUS Loan Limits
PLUS loans are federal loans available for parents of dependent undergraduate students. In this case, the parent is the borrower on behalf of their dependent student and is responsible for paying back the loan. Eligibility isn’t based on financial need, but parents must go through a credit check and demonstrate they don’t have any adverse credit, McCarthy says. The federal StudentAid.gov website defines adverse credit history as “a record of poor repayment history on one or more loans or credit cards,” with specifics listed here.
Someone can have no credit history at all and still be approved for a PLUS loan, McCarthy says.
“It doesn’t look at your ability to repay,” she says. “It really only looks to see if you have an adverse credit history in your past.”
Graduate students can also take out these loans, but must go through the same credit check and are also on the hook for repayment, she says. Parents of independent students cannot get these loans.
PLUS loans don’t have specific caps like direct subsidized and unsubsidized loans do, but amounts can still not exceed the COA. Those who are denied a PLUS loan due to their credit can try filing an appeal or enlisting a co-signer.
Private Student Loan Limits
Federal loans typically have the best interest rates, McCarthy says, but if families are considering PLUS loans to cover the remaining difference, it may be worth it to look into private student loans, which typically come from banks, credit unions and other lenders, and compare interest rates.
“There are some private loans out there that have great terms and conditions,” she says. “I would say to do your research in terms of the repayment, when it starts and what the monthly payments are, because that can vary a lot on the private loan side. On the federal loan side, all of that is set for everybody.”
Eligibility is typically based on a credit check, and those with better credit scores generally receive better interest rates. Private student loans are typically made directly to students, but since many undergraduate students have not yet established a credit history, a co-signer may be required. If the co-signer has good credit, there’s a chance the student could get a lower rate, Miller says.
Something to consider, he says, is “just because it’s a lower rate doesn’t mean it’s going to be easier to pay when payments come due.”
He adds that private loans come with much more limited repayment options. “Even if they have lower balances, those can be the most difficult for borrowers to deal with.”
Private loan limits vary by lender, and some lenders have no maximum. Still, as with federal student loans, private student loan borrowers may only borrow what will finish covering the cost of attendance. Schools typically certify the loans to make sure they are within limits.
What to Consider When Taking Out a Loan
A little foresight and planning go a long way when considering student loans, experts say. Things like aid eligibility, tuition and COA can change on an annual basis, so projecting beyond the current school year and through the duration of the program is key, McCarthy says.
“It’s better to look at that up front and be doing that estimation up front so that you are borrowing reasonable amounts that you can safely repay once you finish your program,” she says.
When factoring in repayment, borrowers should also consider their planned line of work and whether the typical starting salary will be enough to cover loan repayments, experts say. Miller says borrowers whose starting salary is low should enroll in an income-driven repayment plan, which allows borrowers to make smaller loan payments but may lengthen the duration of repayment.
“It’s not just about lowering your payment or receiving forgiveness, it’s about creating a realistic payment that also frees up enough cash flow so that your quality of living doesn’t suffer too dramatically,” he says.
Borrowers who go on to work in public service, either in government or at a nonprofit organization, may be eligible for the Public Service Loan Forgiveness plan, which wipes out all remaining federal direct loan debt after 10 years of full-time service, as long as regular minimum payments have been made. Although previous problems with the program made it almost impossible for borrowers to qualify, a temporary waiver as well as permanent fixes set to take effect by July 2023 should make it easier for students to take advantage of the program. Keep in mind that private loans don’t qualify for forgiveness under the PSLF plan, and neither does part-time employment.
When looking at potential career earnings, don’t be deceived by median salary projections, warns Kalani Leifer, CEO and founder of COOP Careers, a nonprofit focused on helping low-income college graduates overcome underemployment. Oftentimes, the median salary is a best-case-scenario, and many will fall far below that mark. He encourages students to study the Post-Secondary Education Outcomes tool that the United States Census Bureau offers, which includes salary projection data on every university and major in 24 states.
“I encourage folks to look at that in making this decision up front and asking themselves is the loan worth it?” he says.
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How Much Can I Borrow for College? originally appeared on usnews.com
