Student Loans

For most families, paying for college includes borrowing. There are many ways to finance the costs of college, after your family has used savings or other investments. Those include student loans, parent loans, using home equity, personal loans, and even using credit cards (which we do NOT recommend!).

We’ll try here to help you understand the many types of student loans available to families with some brief definitions.

Federal Loans

There are many kinds of federally funded and federally backed (or insured) student loans.

The Perkins Loan:

• Based on “exceptional” financial need and awarded at the discretion of the college or university. Schools usually have a fixed - and modest - amount that they in turn allocate to students. And note: many schools have no Perkins loans.
• Fixed 5% interest rate with no fees and a 9-month grace period (compared to 6 months on most other loan types). No interest accrues while the student is enrolled at least half-time.
• Maximum award of $4,000 per undergraduate year.

Stafford Loans

There are two ways to get the most common kinds of federal loans. The more common one is through the Federal Family Education Loan Program (FFLEP), which makes low-interest Stafford loans available to you or your parents. The government insures these loans and offers a variety of loan types and terms through private lenders, banks or credit unions. Some schools have “preferred lender lists” by which they recommend lenders with whom their students have had good experiences or who offer discounted rates or fees. However, as a borrower, you have the right to choose any lender you wish.

Federal Stafford Loans:

• Are borrowed through lenders.
• The student must be enrolled at least half-time.
• Interest rate is fixed at 6.8% with a 2.5% fee.
• Repayment normally starts six months after leaving school (or after changing enrollment status to less than half-time).

There are two types of Stafford Loans: subsidized and unsubsidized.

Subsidized Stafford

• The student and family must have financial need to qualify.
• Interest is paid by the federal government while in school at least half-time and during grace periods or deferments.

Unsubsidized Stafford

• Financial need is not required to qualify.
• Government pays no interest.
• The borrower can choose to pay the interest each month while in school or allow it to capitalize (be added to the loan principal).

Parent Loans for Undergraduate Students (PLUS)

In addition to other financial aid, parents of undergraduate students may be able to borrow a PLUS loan to help pay for school.

• The student much must be a dependent undergraduate.
• A credit check (looking at credit history and credit rating) is required.
• The student or family does not have to show financial need to qualify.
• Parents may borrow up to the total cost of attendance, minus any other aid received.
• The loan is not subsidized (the government pays no interest).
• Repayment normally starts 60 days after full disbursement of the loan. However, some lenders may allow borrowers to defer payments while the student is enrolled or if the parent is enrolled in school, too.

Federal Direct Loan Program

Your school might participate in the Direct Lending program. These schools have chosen to offer student loans directly to families from the government, without using a bank or private lender. The loans are repaid directly to the federal government and will never be sold to another lender or bank. Direct Lending schools can offer Stafford and/or PLUS loans. Eligibility, interest rates and borrowing limits are the same as for FFELP loans. You have a choice of four repayment plans, with slight term variations from those offered by the FFELP.

Regardless of the type of education loans you and your family decide to use to finance your college education, they all have to be paid back with interest. Keep in mind the total cost of the loan as well as what the monthly payment will be when you enter repayment. Make sure to budget for these loan payments!