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Things to Consider When Borrowing Student Loans

Federal Loans and Alternative Student Loans  Federal student loans are loans funded by the federal government. The application for federal loans is the Free Application for Federal Student Aid (FAFSA). Alternative student loans are non-federal loans made by a third-party lender such as a bank or credit union. Federal loans tend to have better interest rates and more flexible repayment terms. Find more information on federal student loans.

Interest Rates It is important to understand how the government calculates interest on federal student loans. Interest rates on federal loans are fixed for the life of the loan, and not based on a student’s credit history. You can find information about current federal loan interest rates on the government’s website. For alternative student loans, interest rates are based on the credit history of the borrower, (as well as the co-borrower, if necessary) for the loan. Rates can be fixed or variable. If you are looking to borrow an alternative loan, you can work directly with your lender to discuss how interest rates work with their loans.

Loan Fees Federal loans, including Subsidized, Unsubsidized and PLUS Loans, have loans fees that the government keeps as part of each disbursement. The loan fee is taken proportionately from each loan disbursement you receive. You are responsible for repaying the full amount of the loan, including the amount the government keeps for loan fees. Additional information about the current loan fees can be found on the government’s website. Some alternative loan companies also charge loan fees. If you are considering borrowing an alternative loan, please contact your lender directly to determine if they charge any loan fees.

Repayment Plans The federal government offers many different repayment plans to try to meet the needs of student borrowers. Plans range from a standard repayment plan of ten years, to extended plans, to repayment plans that are based on the income of the borrower during repayment. Generally, a borrower will repay the least amount of interest in the standard repayment plan. More information about the different repayment plans offered for federal loans can be found on the government’s website. Alternative loan companies may offer different repayment plans as well. Some loans require immediate repayment while a student is still enrolled, while many offer deferment options while a student is in school. If you are considering an alternative loan, please contact your specific lender to determine the repayment options available to you.

Responsible Borrowing The UMass Lowell Money Management Mentors have provided some tips and advice on borrowing only what you need to help cover your costs. Loans should only be used after you’ve exhausted all other options. Find more information on responsible borrowing.