All About Loans (For Dummies Please)

I’ve really been trying to get a better understanding of the financial aid process for college before I solidify my plans for the application process. A very large part of my research concerns financial aid and how I’m going to pay for college. I’ve looked at a lot of sites online, but I feel better knowing the answers are coming from people who have been through the process. Here are my questions (probably stupid, but I’m just trying to educate myself):

How do loans work?

It seems like a silly question, but I honestly have no clue. I understand that there is usually a capped amount that you can take, and when you have to pay it back you must also pay back interest. I’m confused about how much I’m allowed to take out in order to pay for college. From what I understand, I can only take out a maximum of $27,000 in direct government loans for my four years at college. Is this true? If so, is that enough to pay off what my contribution is expected to be as a dependent student?

Also, how do the loans that my parents take out work?

Will I owe what they owe as well, or will that debt have nothing to do with me? (Not trying to be selfish. I will definitely not put my parents in a terrible situation.)

Finally, what is a reasonable amount of student loans to come out of college with?

I know this is different for everybody, but just a rough estimate or range would be helpful. I plan on being an engineer, so the expected salary is a little bit higher than average, but that obviously won’t be much help at the beginning of my career fresh out of college.


For federal direct student loans, straight from the most authoritative source (you can’t do much better than this):

@BelknapPoint Haha thank you. I have that site bookmarked!

You, as the student, are only allowed $5500 for year 1, $6500 for year 2 and $7500 each for years 3 and 4. As to whether or not that covers your portion, that depends.

The first step is to determine what your parents are willing and able to pay. Then run the net price calculators for schools you are interested in. In order to do that, you need to know information from their income tax filing as well as what they have in assets. Some parents may not share that information willingly so they may need to run the NPC themselves using that information. If they can not or will not (there is a difference) pay that amount, the. You need to look at what the difference is (if a school says they expect $50,000 payment per year and your parents can pay $35,000 then you have a gap of $15,000) and figure out how to address that. You can take the loan amounts listed above and maybe have a summer job. If those can cover the difference, great. If there is still a gap, the you have difficult decisions.

Other loans can be taken out by your parents (called PLUS loans), providing they have the credit rating to get them. Sometimes, parents cosign on private student loans but that is where you can get into trouble. The recommendations I have seen is that the total amount of all educational loans should be less than the first year’s salary with a repayment amount of 8-10% of your gross monthly income. You can search the bureau of labor and statistics to get an idea of the starting salary for whatever type of engineering you are looking for (if it is $60,000, you should not borrow more than that in total and your loan repayment should not exceed $460/mo).

If you are at all thinking of graduate school, then the goal is to have as little student loan debt from undergraduate studies as possible so that you can be able to borrow what you may need for grad school.

You’ve posted several posts about your financial situation. Since finances are a major concern, you need to do what several posters have already suggested: APPLY TO AFFORDABLE SCHOOLS. This means your instate schools.

You can’t really know exactly what the schools are going to give you until the financial aid packet arrives. Your parents’ financial history has been complicated. Now you are asking about loans-adding more concerns about finances.

Those loans have to be repaid. If your parents had to take money out of their retirement accounts to pay bills, then your family has been living beyond their means. They may not qualify for Parent Plus loans. If they don’t qualify, you won’t be able to pay your tuition and fees.

Find an affordable college.

You are not a dummy by any means. But you have a huge blind spot and that is recognizing that your family’s finances are not on solid ground right now.

Plus loans- no. Off the table even if your parents are willing. If they are liquidating a retirement account to pay off bills, taking a parent loan is not even something you should all be discussing.

Your loans- yes- up to the federal maximum, period full stop. At some colleges, the financial aid letter you get will ALREADY include the loans. So they have assumed that you will borrow the maximum amount when they calculated how much they are giving you.

My advice (which you don’t want to take, since I’ve already posted on your other thread). Go find a college which will be head over heels in love with you, your stats put you at the 90%tile of applicants, they give generous merit aid, and will happily accept you and give you a generous merit scholarship which will have nothing to do with your parents finances. So more income, less income, income from a pension- none of that will matter. Those schools exist and they will be delighted to have you, and you will be able to afford to attend.

Will you need to borrow to attend Duke? none of us know. But the time you’re spending trying to figure that out is time you could be spending researching the colleges which have a budget for kids JUST LIKE YOU.

Ok. What else are you looking for that can’t be found on the Federal Student Aid website? Answers to the loan questions you asked in your first post here can all be found on that website.

In addition to your state schools, there are many private schools that give excellent merit and need based aid. Little merit at the elite privates (but they’re very generous on need), but the next tier or two tiers down have lots of merit aid available. Some from the general admission pool and some from the department of study. Not unheard of to go to a quality private for similar costs to an instate public (depending on the state). Actually know several who have recently done that.

Lots of useful information, and handy calculators to help you compare aid offers and better understand how loan interest works.

Most students can take out $27k in Direct Loans. Those are your own loans and you alone are responsible to repay them. If you qualify for financial aid, these loans may show up in your Aid package. Parts of the loans, such as $3k out of the $5500 y ou may take out freshman year, could have subsidized interest if you have otherwise unmet by other aid , need. That means no interest accrual while you are in school. The unsubsidized parts of of these loans start cranking interest as soon as the money is disbursed.

Many folks believe that these are “good“ loans for students to take. Gives kids some responsibility in paying for their education. Taking out much more than this is not usually a good idea because, repaying $27k + Accrued interest is a huge amount for a 22 year old to owe. If from a family where parents are willing and able to help out, this may not be an onerous debt, or if graduate can find a high paying job right out of school,it’s one thing. But if there isn’t much financial help from parents, and a student has to do a job search, relocate, make steps into becoming self sufficient, that loan payment with its interest meter ever running is a heavy ball and chain. You may need a car, apartment deposits , pay for some travel, et etc. Even with zero loans, my youngest had to be very careful with his budge that first year out of college, and he was working for above average (for new college grads) pay, and we helped out.

As for parents, if your parents are already breaking into retirement accounts, throwing more debt onto them is not a good idea. They can take out PLUS parent loans. Similar terms to yours. The financial aid office can guide you through both of these government loan programs.

There are other loans for college where your parent or other credit worthy adult signs with you. Not a good idea IMO, much of the time because it hamstrings you both in terms of credit, owing the money even if you die (PLUS forgiven if you or the parent dies). The terms of these loans can vary and it’s borrower beware.

A good indicator on how much to borrow is how much have you and your parents saved for college. Paying for college is expected on past, present and future earnings. If you have close to $27k saved up from birthday money, odd jobs, parents putting away some money for you do that you can pay $5500, freshman year, borrow $5500 and work during the school year and summer for another $5500 , that’s ideal, IMO

Then looking at your parents, how much have they put away for college in their personal planning? How much can they afford to pay out of current income? That can guide how much they can afford to borrow and well handle repayment.

@cptofthehouse Thank you so much for this response. It really taught me a lot. The student aid government website was really confusing for me, so this was really helpful!

Thank you all for your responses! I’d like to say that I just sat down with my parents and had an actual conversation about aid, ED, and everything else.

It has been decided that I will ED to Duke. I did not fully grasp our financial situation, but my parents are in agreement that they will be able to handle the cost of Duke, even without the financial aid office considering our one-time income a special circumstance. We’ve worked out a plan, and it seems like it will be just fine. I’m going to graduate with student debt, but who doesn’t? It won’t be debilitating according to the net price calculators.

No need for more responses. I think I’ve finally eased my worries.


To clarify…this $27,000 is the total for four years. It’s not $27,000 per year.

Apply to Duke if you want to…but please, please do NOT guilt your parents into paying for a college that is way beyond their ability to pay without taking out loans. Please. If the money isn’t forthcoming from Duke…you need to be prepared to walk away from that acceptance.

It’s September. You can apply to University of Alabama today and you will have an admissions decision AND merit aid package within a few weeks. What’s wrong with doing that? Complete their admissions application and the scholarship application. It should take you all of an hour to complete and submit.

No. Not similar. For starters, the current interest rate for federal direct student loans is 2.75% for undergraduate borrowers, while direct PLUS loans have an interest rate of 5.3%; the loan fees are much different; how interest does (or does not) accrue is very different; etc.; etc.; etc. Misinformation in posts like yours is a perfect example of why the best source of accurate information comes from a trusted entity that can be verified, and not an anonymous poster on a website forum.

@thumper1 Yes, I understand that the $27k is total for all four years.

If anything, I’ve done the opposite of guilting my parents. I have sat them down to talk about the reality of ED’ing to Duke at least 5 times in the past two months. I tell them of the possible financial burden, I run the NPC with them to make sure the estimate is accurate, and I ALWAYS tell them that I can find another one of my top choices to EA to. In the end, they convinced ME to apply to Duke ED. I was heavily underestimating how much they can afford because growing up, I developed a certain perception of our financial situation based on the way my mother talks about it (she is very dramatic). They told me that I should not worry about anything because they know that they have it under control. I trust my parents’ word. If they were unable to afford it, they would tell me.

I do thank you for the recommendation to apply to University of Alabama. I didn’t know that I would receive everything so early if I applied right now. However, I don’t believe my parents or I would want me to go, even if I get an extraordinary amount of aid. It’s not that Alabama is a bad school AT ALL. I just know I wouldn’t be happy there.

Last I saw 42% of undergrads from public schools graduate without debt. Lower for private schools but not impossible.

If you’re considering grad school, med school, or law school the goal should be $0 debt or better for undergrad.

Depending on your major some public schools are more highly ranked than expensive private schools. For CS, UIUC is about as good as you can get and it’s in-state.

Basically, having a car payment every month for 10 years (or more) paying off student debt doesn’t sound like fun.

Good luck.


If your parents have such a great financial picture right now, then how likely would it be that any college, including Duke, would consider a special circumstances review? If your parent financial situation is great, the school would have no reason to give you additional need based aid for your first year.

You have mentioned that your parent income is typically $100,000 a year or so, right? So is that number accurate, or not.

If your parents needed to withdraw money from their retirement account to pay bills, this would indicate to me that their finances were not so terrific.

Or is the income really typically higher than you thought?


I’ll chime in to add that our youngest kid had a VERY hard time accepting our budget.

She was not interested in ANY of the affordable options, and we made the mistake of green-lighting her applying to some schools we suspected we could not afford.

To be honest, I thought the schools would do the dirty work and she would not get accepted. Welp. You guessed it. She got accepted.

So we were essentially looking at one full ride, two full tuition, and then substantially discounted COA (cost of attendance) on the other “sexy” acceptances, but still, upwards of $35K per year.

I’ve read enough posts over the years and talked to enough people IRL that I know there can be a whole lot of wishful thinking involved.

It was not easy to rip that band-aid off and tell our kid it was between two OOS public universities or community college. I mean, she was REALLY mad at us. We are not poor, but we do not have fat bank accounts. We have a tight budget without much room for fun spending. Did she understand that? At 18, I think not.

She reluctantly took the full ride to University of Kentucky. She was embarrassed to tell people where she was going. What she thought was going to be the end of the world and the worst thing that could have happened to her, turned out GREAT. She did very well there in her major, lived in Lexington year round starting sophomore year, had her independence, and got several acceptances to grad schools and some nice financial offers. She is borrowing for some living expenses for grad school, but she has no UG debt.

I have also read the very good advice to remember to think of the four year cost. It might be easy for a family to say “It’s only $23K per year!” but another thing to say $92K for an undergrad degree!".

We have seen firsthand, parents stretch for the first kid, and then be unable to pay for all four years. There is debt plus no degree. Then, nothing for the younger siblings.

Go forward with eyes wide open and look very hard at the numbers. Everything. Travel. Books. Health Insurance. How will tuition, R & B be paid year one? Year two?

What will happen if you have an acceptance on the table from a less- desired school but it is a spectacular financial offer?

These are hard decisions for most families. Wishing you the best!