A student loan is a form of financial aid that must be repaid with interest. They are different than scholarships, which are usually awarded because of academic or athletic merit and do not have to be repaid.
Few students can afford to pay for college without some form of student loans. Education loans come in three major categories:
- Federal loans - Stafford and Perkins loans provided by the U.S. government
- Parent loans - Parent Loan for Undergraduate Students (PLUS) provided by the U.S. government
- Private loans - Provided by financial institutions
Since July 1, 2010, all new federal education loans have been made through the Direct Loan program. These loans are made through the college's financial aid office with funds provided by the U.S. Department of Education. This includes the federal Parent PLUS loan in addition to student loans.
Federal Stafford Loan - The main type of federal student loan is called the Stafford Loan. All Stafford Loans are either subsidized (the government pays the interest while you're in school) or unsubsidized (you pay all the interest, although you can have the payments deferred until after graduation).
- Subsidized - Subsidized loans are based on financial need. Interest does not accrue on the loan while you are in school at least half time, or during any future deferment periods. The federal government pays the interest during these times. Additionally, there are maximum amounts you can receive per school year. Check with your school’s financial aid office for current limits. After you submit the FAFSA, the U.S. Department of Education and your school will determine your final eligibility for a subsidized Stafford loan.
- Unsubsidized - Unsubsidized loans are not based on financial need. You do not have to make any payments until six months after graduation (or six months after you drop below a half time status). However, interest will begin accruing when you receive the loan, increasing the size and cost of the loan. As with a subsidized loan, there are maximum amounts you can receive per school year. Check with your school’s financial aid office for current limits. The standard repayment term is 10 years, although you can use alternate repayment terms. (extended, graduated and income contingent repayment) by consolidating the loans.
Federal Perkins Loan - This type of federal loan is awarded to undergraduate and graduate students with exceptional financial need. This is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government. The Perkins Loan is the best student loan available because it is a subsidized loan, there are no origination or default fees, and the interest rate is 5 percent. There are maximum amounts you can receive per school year. Check with your school’s financial aid office for current limits.
Parent PLUS Loan - Parents of dependent students can take out loans to supplement their children's student loans. The federal Parent Loan for Undergraduate Students (PLUS) enables parents to borrow money to cover any costs not already covered by the student's financial aid, up to the full cost of attendance. There is no cumulative limit. Paying back Parent PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan, but fails to make the payments on time, the parents will be held responsible.
Private Education Loans - Private loans may help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Private loans are offered by financial instututions and there are no federal forms to complete. Eligibility and terms may depend on your credit score. These loans tend to cost more than federal loans, and they typically have variable interest rates.
Make Informed Decisions - If you plan to take out student loans, do your research to make sure you know exactly what you're getting into. Make sure you're getting the lowest interest rate. Make sure you understand how much your monthly payment will be and when payment is due. While you're in school, making payments on at least the new interest that accrues avoids negative amortization. This can save you a lot of money and help you pay off the debt sooner.