You may not be able to avoid borrowing some money to help pay for college. Stafford loans and Perkins loans are the two major loan programs that loan directly to students. The Perkins loan program was allowed to expire in 2015 in an effort to simplify the student loan system. It was then reinstated through September 30, 2016 for new borrowers and expired September 30, 2017. Those who are receiving Perkins loans will be allowed to continue to receive the loans through March 31, 2018. A third category, PLUS loans, are loans made directly to parents to help them pay for a child's cost of attending an undergraduate program.
Stafford loans are either subsidized or unsubsidized loans. Stafford loans used to be disbursed by a bank or other private lender that participated in the Federal Family Education Loan Program (FFELP). The FFELP has been eliminated and now the government disburses the loans directly through the Federal Direct Student Loan Program (FDSLP). Subsidized Stafford loans are based on financial need while the unsubsidized Stafford loans are not need-based.
The amount you can borrow with a Stafford loan depends on whether you are an undergraduate or graduate student. You can also borrow different amounts each year depending on your year in college.
Undergraduate students who are dependent on their parents can borrow up to a total amount of $31,000, or $57,500 if independent. No more than $23,000 of those amounts may be subsidized loans. Graduate students can borrow up to a total of $138,500 with no more than $65,500 being subsidized loans. Medical students can borrow up to $224,000 with no more than $65,500 being subsidized loans. Beginning July 1, 2012, graduate students are not eligible for new subsidized loans.
The following calculators are useful in budgeting college expenses and loan repayments:
The interest rate on Stafford loans is indexed to the yield on 10-year T-bills. For loans disbursed during the 2020-21 academic year, the interest rate is fixed at 4.30% for graduate student loans. The interest rate for subsidized and unsubsidized loans made to undergraduate students is 2.75% for 2020-21. With a Stafford loan, you may defer interest payments until the loan's grace period expires. (The deferred interest is added to your loan amount.)
Perkins loans are student loans based on financial need that the school makes directly to the student with the use of government funds. The federal government pays the interest during school and during a grace period that lasts nine months. The interest rate cap on a Perkins loan is 5%.
To apply for either a Stafford or Perkins loan, as well as any other federal financial aid, you must complete a Free Application for Federal Student Aid (FAFSA).
As a result of the 2001 tax law, you can take a tax deduction of up to $2,500 for interest expense paid on student loans over the entire loan term. This provision was recently extended permanently under the Taxpayer Relief Act of 2012. (Previously, you were limited to taking a deduction during the first 60 months of the loan term.)
The tax law also increases the income limits for taking this deduction. For taxpayers filing a single return in 2021, your allowable deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $70,000. The allowable student-interest deduction phases out completely when your MAGI reaches $85,000. For married taxpayers filing a joint return, the increased income limits are $140,000 and $170,000, respectively.
To take a student loan interest deduction, enter the amount of the deduction on line 20 of the 2020 IRS Form 1040 Schedule 1.
If your income falls within the income limits shown above, see IRS Pub. 970: "Tax Benefits for Education" to calculate a partial deduction.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Next, we'll take a look at qualifying for student aid.