Timing for Federal Direct Loans

Paying for College
1

S23 received an email from the Fin Aid office of his (stating in fall) college saying he needs to sign a couple of forms:

  • Direct Loan Entrance Counseling
  • Direct Loan Master Promissory Note

We’re trying to figure out if he needs to do those things now, or if he can or should wait until later in the school year.

We’re sort of on the fence about whether he should take out the loans (unsubsidized). We think he will need to take out some loans over the 4 years, we’re just not sure if he should

  • go ahead and take the freshman year loan in the fall,
  • wait to take the freshman year loan in the spring, or
  • skip the freshman year loan.

Total COA is $52,000 this year. Other parents from his school say costs actually go down in future years because students move off campus. We’re assuming total costs something like $215,000 for 4 years.

We have:
100,000 (parent savings)
40,000 (parent cash flow over 4 years)
40,000 (student savings)

So we’re looking at ~35,000 to be made up from S23 working and loans over the 4 years. On one hand, if he takes out the loan freshman year (and each of the next 3 years), he will almost certainly not be stressed about how much money he needs to make each year. On the other hand, the freshman year loan has the longest to accrue interest and it is the lowest amount, so it might be worth skipping that one.

If he does take the freshman year loan, I read somewhere about students taking it in the spring instead of fall, to reduce interest accrual. My husband says that sounds like more effort/stress then would be saved in interest accrual. But I’m wondering if it is actually a pain to do it this way?

And, does anyone know about the forms the department is asking him to sign? If he signs those, does that mean the money is automatically dispersed in the fall? If he doesn’t sign them this summer, does he lose access for the whole year?

Thanks for whatever insight you can provide!

2

I’d review tax benefits. We weren’t eligible for the AOTC because we only used 529 funds instead of paying cash (or loan dollars) the first semester for our first student. She graduated early too so we were never able to utilize a 4th year.

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3

The forms are required before any loan proceeds can be disbursed to the student’s account. Getting a loan involves accepting the loan amount (typically on the student portal), completing entrance counseling & completing a Master Promissory Note (the last two steps are usually done online on a federal website).

If he completes entrance counseling & the MPN, the money would only be automatically disbursed to his account if he has actively accepted a loan amount (again, this is usually done on the student portal, but some schools might do it using a signed award letter).

If you want to wait, he can complete entrance counseling & MPN later, when he decides if he wants to borrow. He will need to accept his loan, complete entrance counseling & complete an MPN. He can do this at any point in the year, as long as he is enrolled at least half time when the loan is disbursed.

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4

No penalty for completing the forms now and not taking the loan until spring. Most schools require you to take the loan at least 2 weeks before the end of the semester, so calendar it for Easter. IMO, it’s easier for a student to do the counseling form and the MPN now as it is one less thing to do during the school year.

If he doesn’t take the $5500 during the first year, he can’t take it later. The total over 4 years is $27k. but has to be taken during the year for that amount ($5500, $6500 etc) If he takes it freshman year and doesn’t need it, just put it in a savings account and he won’t have to include it as ‘student savings’ on the next FAFSA.

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5

Can you explain why it can be excluded from student savings under this scenario?

6

Funds from financial aid that are still in the bank at the time the FAFSA is filed are excluded from asset reporting.

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