This article was written in collaboration with the Financial Aid and Scholarships Office. For details about borrowing and the terms for specific loans, please visit their website.
A Guide to Loans
Federal student loans can be a critical part of your education financing plan as a UC Berkeley Student. Understanding financial aid and learning the ins and outs of loans can be daunting for many students. We connected with Cruz Grimaldo, Associate Vice Chancellor of Financial Aid and Scholarships & Cal Student Central at UC Berkeley, to help explain loans and address common misconceptions students may have toward this type of financial aid. Loans can be a great resource when used conservatively and wisely.
Why and when should students consider taking out a loan?
Loans have a variety of uses, and students may consider them for very different reasons. They can help provide you with the funding you need to meet your educational costs, so you don’t need to work as many hours, or end up skipping meals or running out of money before the semester ends. Loans can allow you to reduce or eliminate the need to work, leaving you with more time to focus on classes and the student experience. They also encourage students to track expenses and budget long-term. Student loans, if managed properly, can be an excellent investment in your future.
Tip: Carefully consider whether or not you really need to borrow, and if you do, to borrow as little as necessary.
Federal student loans offer many benefits compared to other options you may consider when paying for college, including:
- The interest rate on federal student loans is fixed and is usually lower than that on private loans, and much lower than that on a credit card.
- You don’t need a credit check or cosigner to get most federal student loans.
- You don’t have to begin repaying your federal student loans until after you leave college or drop below half-time enrollment.
- If you demonstrate financial need, the government pays the interest on some loan types while you are in school and during some periods after school.
- Federal student loans offer flexible repayment plans and options to postpone your loan payments if you’re having trouble making payments.
- If you work in certain jobs, you may be eligible to have a portion of your federal student loans forgiven if you meet certain conditions.
Use the Calculate Your Refund or Balance Due worksheet to understand your expected balance (refund or amount due) after financial aid has been disbursed to inform your decision on how much you may need to borrow.
What are things to be mindful of when it comes to loans?
You can actually borrow less than the total loan amounts offered in the My Finances tab in CalCentral, and we recommend that you only borrow what you need. Here are some tips to keep in mind when borrowing:
- The less you borrow, the less you have to repay later on.
- Be sure to estimate repayment amounts before you borrow.
- Total student loan debt should be less than your starting annual salary after graduation.
- Use loans only for educational purposes—not for buying a car, going on vacation, etc.
- Make a budget without using loans as a resource. Borrow only what you need to cover remaining expenses.
Check out the Center for Financial Wellness page on Managing Debt to discover more tips.
What are some misconceptions about loans that you see students struggle with?
Many students think that any debt is “bad” debt, which is not necessarily true. Student loans can help you meet your costs today, and if payments are made on time and in full once repayment begins, they can be one way to establish good credit.
Other common misconceptions about loans include:
- All loans are the same.
- Consumer debt (i.e., credit card debt) is better than loan debt.
- The belief that students will not be able to pay them back.
- Pressure to take the full amount of loans offered.
- You don’t have to worry about loans until you are repaying them.
- Loans can just be forgiven.
What are the differences between loan types? Is one “better” than the other?
In general, subsidized loans tend to have slightly better terms than unsubsidized loans, but they are limited to students with financial need. Federal Direct Loans tend to have lower interest rates and better terms than Private Alternative Loans.
Federal Direct Loans are available to most students regardless of income and provide a range of very flexible repayment plans, including income-based repayment plans and loan forgiveness benefits.
- Federal Direct Subsidized Loans are need-based, low-interest loans with flexible repayment options for undergraduates and no interest payments for students when enrolled in a full-time course schedule.
- Federal Direct Unsubsidized Loans are non-need-based, low-interest loans with flexible repayment options for undergraduate and graduate students. Interest accrues once the loan is disbursed and repayment begins six months after leaving full-time enrollment as a student.
- Federal Direct PLUS Loans are available to graduate or professional students and parents of dependent undergraduate students and do not require a demonstration of financial need (a credit check is required).
The Berkeley Loan is a need-based, low-interest loan available to undergraduate students who are enrolled in at least six units, are California residents, and demonstrate financial need based on their aid application.
The DREAM Loan is for eligible undergraduate and graduate students enrolled in at least six units, who qualify for an AB 540 nonresident tuition exemption, and who demonstrate financial need based on their aid application.
Private Alternative Loans can help fill the gap between the total cost of attendance and other aid, but it is recommended to prioritize other resources that have lower interest rates and better loan terms. Private education loan providers are not required to provide the same repayment options available with Federal student loans.
Short-Term Emergency Loans are interest-free loans for undergraduate and graduate students, designed to help meet unanticipated expenses directly related to the cost of education. These funds can be approved and issued rapidly and must be repaid in approximately 60 days after completing the application. Since these loans need to be repaid in a relatively short time, it’s important to read all the details about the loan and have a plan for repayment at the time you complete the loan application.
Do you have advice for students who decide to take out loans?
We encourage you to make an appointment with a peer coach in the Center for Financial Wellness (CFW) and explore their resources to repay your loans. They can give you the tools for building a spending plan and teach you the basics on borrowing, like when to borrow and how to make sure you are borrowing only what you absolutely need. The CFW team also frequently offers workshops on borrowing and debt. Check out their Group Workshops and Events page for upcoming workshops.
All UC Berkeley students, faculty, and staff have access to iGrad, an online, personal finance tool that includes a loan payment calculator, which can help you determine the total amount you will eventually pay on a loan.
After you receive your official financial aid offer, you can work on completing loan requirements. To begin, you should:
- Review this student loan checklist for required online processes that you need to complete in order to receive your loan funds.
- Compare subsidized and unsubsidized loans with other types of federal loans to decide what works best for you.
- Watch this short video about responsible borrowing and learn the fundamentals.
If you want to get more informed on the types of financial aid available to you as a UC Berkeley student, check out our other blogs featuring financial aid experts: “Financial Aid Basics” and “6 Financial Aid Tips to Make Your Life Easier.”
Want More?
- Learn how to manage your finances as a student
- Meet Rafael, a peer coach at the Center for Financial Wellness.
- Your guide to applying for Work-Study and learning more about its benefits.