Every year, thousands of college students rely on loans to help finance their education. The vast majority of this money is doled out by the government. And, as you might already know, the first step to receiving a loan is filling out a Free Application for Federal Student Aid (otherwise known as a FAFSA). Of course, you’re probably also wondering about the types of loans for which you might be eligible. Well, we’ve conveniently compiled a simple overview below:
Subsidized Federal Stafford Loans: The most common type of loan, Subsidized Federal Stafford Loans are need-based and government-secured. They offer low interest rates, deferred payments until six months after graduation (or if you drop below halftime in your course-load) and flexible repayment plans. This is probably also a good time to note that “subsidized” means you are not accruing interest while you are in college, within the six-month grace period or in a deferment agreement.
Unsubsidized Stafford Loans: Unlike the subsidized loans mentioned above, Unsubsidized Stafford Loans are not need-based. Moreover, the interest from said loan(s) will accrue while you are in college. The repayment period begins after you stop going to college, drop below halftime status or graduate.
Federal Perkins Loans: These loans carry many of the same benefits of Stafford loans and are disbursed by the college to students who demonstrate the most financial need. However, there are a few key differences. Most notably, the interest rate is lower, borrower eligibility is determined by tighter “need-based” standards, there is no fee and there is a longer grace period before repayment.
PLUS Loans: Of course, your parents are also eligible for government loans. If you are a dependent, your family may qualify for a PLUS Loan. This type of loan will cover the cost of attending your selected college minus whatever financial aid (scholarships, grants, student loans) you have already received. Therefore, say the cost of attending your college is $10,000 per semester and your total aid package is $4,000. Your parents can take out a PLUS loan for the remaining $6,000 and have the funds paid directly to your college or university. If there is any money left over, a check will be sent to your parents and they may apply the funds to your school account. Be aware that there are some need-based criteria as well as a credit check so make sure your parents complete their portion of the loan application! Your college will complete the section regarding the cost of attendance and your financial aid package.
Private Loans: If you find yourself in need of additional aid, you (and your family) might consider taking out a private loan. After all, private loans are the third most common resource for student borrowing. They often come from a bank or credit union and generally carry higher interest rates that are based upon the borrower's credit history and ability to repay said loan.
Certainly, there’s also a lot to understand beyond the names of specific loans. For starters, if the amount of money you are borrowing directly for college exceeds your Expected Family Contribution (“EFC” as determined by the FAFSA Student Aid Report), you might experience a reduction in need-based college grants and scholarships -- funds that don't have to be repaid. Further, you must also realize that interest rates are usually variable and, although they are lower than most credit card interest rates, may rise significantly. Additionally, interest rate and borrower qualification are determined by credit score (typically a 650 FICO score minimum for eligibility), so you may consider adding a co-borrower with a better credit score to qualify for a more economical interest rate. Finally, private loans may carry more flexible payment options, but may be more costly in the long run than government-secured loans (Stafford, Perkins, PLUS, etc.) or home equity loans.
There’s no denying that college is an expensive endeavor. And taking out loans will definitely help ease the immediate financial burden. However, given that this is money you will need to repay, it’s important to thoroughly research your options!