Are there limits to borrowing for student loan debt?

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Q. How does anyone manage to get $70,000 in debt from student loans in the first place? I just put two kids through college so I am familiar with the FAFSA, but aren’t there limits on how much can be borrowed? My kids told me the super high loans essentially amount to parents taking out bank loans, using their houses as collateral. Maybe I just have a hard time believing so many parents would take such a massive risk. What am I missing?
— Parent

A. There are limits to what can be borrowed, but the limits are pretty high.

It’s actually far easier to get caught up in the student loan debt trap than you might think.

For many, the high price of college forces students to take on large student loans to fund their education.

There are both federal student loans, which are offered by the government, and private student loans that a student can apply for from a bank or a financial institution, said Patricia Daquila, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

“The federal student loans are either subsidized or unsubsidized, but are limited to an annual loan limit that is based on your year in college,” she said.

The difference for a subsidized loans is that you do not accrue interest while you attend school at least half-time. That compares to an unsubsidized loan, which accrues interest while the student is in school, Daquila said.

The current interest rate for federal undergraduate student loans is 5.05 percent while the rate of federal graduate is 6.6 percent.

These federal student loans are based on your family and financial situation as provided in your FAFSA.

“Federal student loans generally offer a lower interest are and have benefits,” Daquila said. “A student should generally consider the Federal student loans first, and then look to the private student loans if they still need money for college.”

For dependent students who are in the first year of undergraduate college, the federal limit is $5,500, of which which no more than $3,500 can be subsidized, she said. The second year of undergraduate is limited to $6,500 and no more than $4,500 may be subsidized. For the third year of undergraduate and beyond, the limit is $7,500, of which no more than $5,500 can be subsidized.

“The most dependent undergraduate students can take out for federal student loans for both subsidized and unsubsidized loans for all years is $31,000, of which no more than $23,000 can be subsidized,” she said.

Private loans are a different story.

“Private student loans are based on your credit profile and your cosignor’s credit, if applicable,” she said. “The annual limit is much higher and is usually limited to the cost of attendance minus any financial aid received.”

She said the total limits for private student loans are usually between $75,000 and $120,000, with higher limits for graduate students.

For independent students and students whose parents are unable to obtain PLUS loans, the limits are higher.

In the first year, the limit for federal student loans is $9,500, the second year is $10,500, and third year it is $12,500. The amount subsidized remains the same as for dependent students.

Daquila said the total federal loan limit for independent students is $57,500 for undergraduate students and no more than $23,000 may be in subsidized loans.

For graduate students, the annual loan limits is $20,500, which is totally unsubsidized.

The total federal loan amount that can be borrowed for graduate or professional students is $138,500, which includes all federal loans received for undergraduate and graduate study, she said

As your kids noted, parents sometimes may borrow against their equity in their home to help fund a college education for their child.

“A home equity loan may offer a lower interest rate than either the federal or a private student loan, which may entice a parent to take on the risk of using their home as collateral,” she said. “However, even though the cost of a college education is high, the value of a college education for both the students and the parents may far exceed the risk.”

So how can someone rack up $70,000 in student loan debt? Far too easily.

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This story was originally published on May 23, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.