Straightforward information on student loans
If you’re not very familiar or educated about student loans, the huge variety of different loan types and options can seem very intimidating. We understand this, so to help you understand the loan landscape, here’s an overview of the different types of student loans available, including Perkins Loans, Stafford Loans, the Federal Direct Loan Program, Parent PLUS Loans, Graduate PLUS Loans, Consolidation Loans, and private or alternative loans.
Federal Loans
There are numerous types of federally funded and federally backed (or insured) student loans. One type of loan available (for those who qualify) is called the Perkins Loan.
Perkins Loans
- For undergraduate and graduate students who demonstrate exceptional financial need.
- Fixed 5% interest rate.
- Maximum award of $5,500 per undergraduate year.
- Maximum award of $8,000 per graduate year (cannot exceed $60,000 total when combined with undergraduate Perkins borrowing).
Direct Lending Program
The Direct Lending Program, run by the Department of Education, makes low-interest loans available to you or your parents. The government insures these loans and offers a variety of loan types and terms. Rather than borrowing through a bank or other participating private lender, Direct Loans come straight from the federal government to your school account.
Eligibility, interest rates and borrowing limits are listed below. More information can be found at the Direct Loan program’s website. Once you are in repayment mode, you will send your monthly Direct Loan payments to the U.S. Department of Education’s Direct Loan Servicing Center.
Federal Stafford Loans
- Are borrowed directly from the federal government.
- Require that the student be enrolled at least half-time.
- Have a fixed interest rate
- Start repayment six months after leaving school (or attending less than half-time).
There are two types of Stafford Loans - subsidized and unsubsidized.
Subsidized Stafford Loans
- Require that you demonstrate financial need
- Have a fixed interest rate of 4.5% for loans disbursed between July 1, 2010 and June 30, 2011 for undergraduate students
- Have a fixed interest rate of 6.8% for graduate students
- Pay the interest on behalf of the borrower while the borrower is enrolled in school at least half-time and during grace periods or deferments
Unsubsidized Stafford Loans
- Do not require that you demonstrate financial need
- Have a fixed interest rate of 6.8% for all students
- Do not pay the interest on behalf of the borrower while the borrower is in school
- Allow the borrower to pay interest each month while in school or allow it to capitalize (be added to the loan principal)
Direct PLUS Loans
- For the parents of dependent students and for graduate/professional students
- Do not require that you demonstrate financial need
- May help pay for the cost of attendance minus all other financial assistance
- Have a fixed interest rate of 7.9%
- Interest is charged during all periods
Parent Loans for Undergraduate Students (PLUS)
In addition to your other financial aid, your parents may be able to borrow a PLUS loan to help you pay for school. Here are some qualification and things to remember:
- You must be a dependent, undergraduate student for your parents to borrow for your education.
- A credit check (into credit history and credit rating) is not required but the lender will look for adverse credit history (previous default on debt).
- You do not have to show financial need to qualify.
- Parents may borrow up to your total cost of attendance, minus any other aid you receive.
- The loan is not subsidized (the government pays no interest on the borrower’s behalf).
- Repayment normally starts 60 days after full disbursement of the loan. However, some lenders may enable borrowers to defer payments while the student is enrolled.
Graduate PLUS Loans
If you are a graduate or professional student working on an additional degree or certificate, you may qualify for a Graduate PLUS loan. Except for the requirements of undergraduate and dependent status, eligibility for GradPLUS loans is the same as for Parent PLUS loans.
The loan terms are similar, too, but have an additional benefit of allowing you to apply for a deferment while you are enrolled in your graduate program at least half-time.
Consolidation Loans
Consolidation loans let you combine multiple student loans in order to make a single monthly payment, thereby “consolidating” your education debt. You can arrange a consolidation loan through either the government or a private lender.
- Interest rates on federal student loan consolidation are based on the rates at which you originally borrowed, but are capped at 8.25%.
- Federal consolidation loans have a fixed rate-private student loan consolidation programs may have fixed or variable rates.
- Consolidation loans may lower your monthly payments and extend your repayment period.
- Consolidation loans may cost more in long-term interest (because you’re paying the loan over a longer period of time).
Private Loans
Even if you qualify for a scholarship or a federally funded grant or loan, you still may need extra cash to pay your school bills. You may look for that money from private loans offered by some banks and other private lenders. However, you should almost always maximize your borrowing from federal loans before tapping into private student loans.
Here’s why: Interest rates on federal student loans are limited to a relatively low percentage. That’s not the case with private loans. Also, interest on private loans may be capitalized more often (meaning, added to the loan principal), increasing the amount of money you ultimately are charged for borrowing.
Approval and terms for private loans are based on your credit history. If your rating is bad or non-existent, you might need a cosigner to qualify. Poor or minimal credit may also result in a higher interest rate on your loan.
Additionally, fees and penalties can be higher than with government-backed loans. And your repayment terms may not be as favorable. All in all, the smart thing is to use private loans only as a last resort-and to make private loans as small a portion of your financial aid portfolio as possible.
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