Because grants and scholarships are not always enough to cover the entire cost of college tuition and related education expenses, many students and their families rely on student loans to help finance their education.
There are two types of education loans:
- Federal Education Loans - These loans are funded and/or guaranteed or insured by the federal government, which lends directly to you. These include Stafford Subsidized and Unsubsidized Loans, Perkins Loans, and Parent Loans for Undergraduate Students (PLUS Loans) for parents of dependent undergraduates.
- Private Education or Alternative Loans - These are non-federal loans funded by banks and other lending institutions that lend money to you.
Federal education loans often have more favorable interest rates and offer added benefits - such as low origination fees; a low, fixed interest rate; and deferment and forbearance options - that provide significant advantages over private education loans. As a result, it is generally advisable to consider your federal student loan options before investigating private student loan alternatives.
To apply for all federal student loans, you must complete a federal student aid application (FAFSA) at the Department of Education's website. Private education loan applications are available at banks and other lending institutions that offer those loan options.
Education loans can be a useful resource in helping to finance your education. However, it is important to note that by accepting a loan, you will be entering into a binding agreement to repay monies borrowed plus any applicable interest that may accrue (although most allow you to defer repayment until after you graduate). Defaulting on a loan can negatively affect your credit and may have other serious financial consequences. Therefore, when borrowing, be sure to carefully read and understand the Master Promissory Note (MPN), which outlines the loan terms and conditions, and borrow only what you need and can reasonably afford to repay.
Federal Student Loan Programs
Federal Subsidized Stafford Loan
Federal Subsidized Stafford Loans (otherwise known as Direct Subsidized Loans) are available to students who demonstrate financial need and who are enrolled at least half-time.
Subsidized Stafford Loans offer a low, fixed interest rate (3.4% during the 2011-2012 academic year), and you do not have to repay your loan while you are attending college full-time. The federal government pays the interest that accrues on these loans while you are in school, during a 6-month grace period, and during periods of "deferment." A loan is in deferment when the lender permits you, the borrower, to postpone payments for certain financial and other qualified reasons. Your Federal Stafford Subsidized Loan eligibility is not based on your or your parents' (if you are a dependent student) credit score.
Federal Unsubsidized Stafford Loan
Federal Unsubsidized Stafford Loans (otherwise known as Direct Unsubsidized Loans) are not awarded based on need and are available to students who are enrolled at least half-time.
Unsubsidized Stafford Loans offer a low, fixed interest rate (6.8% during the 2011-2012 academic year). Although you do not have to repay your loan while you are attending college full-time, the primary difference with an Unsubsidized Stafford Loan is that you are responsible for the loan interest that accrues during this time. You can pay the interest that accrues while you are in school, or it can be capitalized (added to your total loan amount) and deferred for payment until after the 6-month grace period that begins when you leave school. As with Subsidized Stafford Loans, eligibility is not based on your or your parents' (if you are a dependent student) credit score, and Federal Unsubsidized Stafford Loans feature many benefits, such as deferment and forbearance options, that make them preferable to private loan alternatives.
Annual Federal Stafford Loan Limits:
- First year: $5,500 (as much as $3,500 may be subsidized)
- Second year: $6,500 (as much as $4,500 may be subsidized)
- Third year and beyond: $7,500 (as much as $5,500 may be subsidized)
- First year: $9,500 (as much as $3,500 may be subsidized)
- Second year: $10,500 (as much as $4,500 may be subsidized)
- Third year and beyond: $12,500 (as much as $5,500 may be subsidized)
Federal Perkins Loan
Federal Perkins Loans are awarded to students who demonstrate the most need, and they are available to those who are enrolled at least half-time at a college or university that participates in the Perkins Loan Program.
Perkins Loans offer a low, fixed interest rate (5% during the 2010-2011 academic year). The federal government pays the interest that accrues on these loans while you are in school, during the 9-month grace period that begins when you leave school, and during periods of "deferment."
In addition, Perkins Loans offer generous loan forgiveness options to members of the military and other students who meet certain qualifications. Loan forgiveness is when the federal government cancels all or part of an education loan.
Annual Perkins Loan Limits:
- As much as $5,500
- 10-year repayment term
Parent Loan for Undergraduate Students (PLUS)
Federal PLUS Loans are not awarded based on need and are available to parents of dependent undergraduates or to independent students. Additionally, Direct PLUS Loans are available to students pursuing a graduate or professional degree.
PLUS Loans allow you to borrow up to the full, published cost of attendance at your college or university, less any other student aid you receive. For example, if the annual cost of attendance at your school is $10,000 and you receive $5,000 from other student aid programs, you can borrow as much as the remaining $5,000 through the PLUS Loan program.
PLUS Loans offer a low, fixed interest rate (7.9% for loans disbursed between 7/20/10 and 6/30/2012). PLUS Loans enter repayment and begin accruing interest on the day they are disbursed. You can opt to begin repaying the principal and interest that accrues while you are in school through regular, scheduled monthly loan payments, or you can defer payment until after the 6-month grace period that begins when you leave school or drop below half-time enrollment. If you defer repayment, accrued interest will be capitalized (added to your total loan amount) for payment after you leave school.
In addition to interest, borrowers will pay a fee of 4% of the loan amount. This fee will be deducted proportionately each time a loan disbursement is made.
PLUS Loan borrowers (your parents if you are a dependent, or you if you are an independent or graduate student) must have a good credit history in order to qualify for a PLUS Loan. If your credit score isn't acceptable, you may still be able to receive a PLUS Loan by obtaining a guarantor - someone who does have a good credit score and agrees to repay the loan if the borrower fails to do so.
Annual Plus Loan Limits:
- As much as the cost of attendance, less other student aid
Special Consideration for Military Affiliation:
If a parent qualifies under the Service Members Civil Relief Act, the interest rate on loans obtained before entering military service may be capped at 6% during the parent's military service. Parents must contact their loan servicer to request this benefit.
In addition, no interest is charged (for a period of no more than 60 months) on Direct Loans first disbursed on or after October 1, 2008, while a borrower is serving on active duty or performing qualifying National Guard duty during a war or other military operation, or other emergency, and serving in an area of hostilities qualifying for special pay.
State Student Loan Programs
During the 2009-10 academic year, there was over $8.8 billion awarded by state higher education organizations. Most of the state programs are available only to students who attend a college within their state of residence. Some states have established reciprocity agreements with neighboring states to help families manage college costs.
Depending on your state residency, you may be eligible for state-based student loans. As with federal loans, state loans have lower interest rates and repayment terms than private loans.
You can check with your college financial aid office to see if your state offers specific aid or loan programs.
Private Student Loan Programs
Private Education Loans, sometimes also referred to as Alternative Education Loans, are variable-interest-rate loans offered by banks and other private lenders that you and/or your family may use to help pay for up to the full cost of your tuition and related educational expenses. They are not need-based, and you do not have to submit a FAFSA to apply.
Private Education Loans are credit-based, meaning that the borrower must have a good credit history in order to qualify. If your credit score isn't acceptable, you may be able to receive a Private Education Loan by obtaining a guarantor - someone who does have a good credit score and agrees to repay the loan if the borrower fails to do so.
Private Education Loans may be taken out alone or as a supplement to other financial aid. Fees and interest rates can vary greatly, so when considering a Private Education Loan, you may want to "shop around" for a lender that offers the best interest rate, repayment terms, and deferment options, as well as the lowest fees.