Types of School Loans
There are a number of different student loans out there designed to fit your specific borrowing needs. A brief overview of each type appears below.
Stafford Loan
A Stafford Loan is a type of federal student loan that is paid back by the student.
How much you’re eligible to borrow with a Stafford Loan is determined by your year in college (freshman, sophomore, junior, senior) as well as your Expected Family Contribution (EFC). The interest rate on Stafford loans is fixed by the federal government and is currently at 6.8% for Stafford Loans dispersed after July 1, 2006. If your loan was dispersed before July 1, 2006, the rate decreases from 6.62% to 3.6%, effective July 1, 2008.
There are two types of Stafford Loans – subsidized and unsubsidized.
- Subsidized means that the federal government will pay the interest on the loan while you’re in school. Your first payment is due within six months after you graduate, stop attending school or drop below half-time student status. In order to receive a subsidized Stafford Loan, you must be able to demonstrate the appropriate level of financial need.
- Unsubsidized means that you are responsible for all interest that accrues on your loan from the time of disbursement through repayment of the loan. You can have the payments deferred until after you graduate or leave school, whichever comes first.
There are limits to how much you can borrow per year in Stafford Loans, depending on your year in school and your family’s financial situation. You could reach the limit by getting just a subsidized loan or just an unsubsized loan. However, some students will combine the two by borrowing beyond their awarded subsidized loan amount in the form of an additional unsubsidized loan.
Perkins Loan
A Perkins Loan is a type of federal
student loan that is paid back by the student. This loan is
awarded to students who show “extraordinary financial need.”
Perkins Loans typically have a $4,000 per year maximum and
$20,000 total maximum that can be borrowed by each student.
The interest rate on a Perkins Loan is fixed by the federal
government at 5%, and you will typically have up to 10 years
to repay the loan, depending on how much you owe.
Parent PLUS Loan
A Parent PLUS Loan is a type of
federal loan that is taken out by parents with dependent
students in order to supplement their student’s financial
aid package and is paid back by the parent. The amount a
parent can borrow is determined by subtracting the amount of
financial aid the student receives from the student’s cost
of attending a particular school as defined by that school.
So, if you attended a school that cost $35,000 a year, and
you receive a financial aid package of $15,000, the maximum
amount your parent could borrow with a PLUS Loan would be
$20,000 per year.
PLUS Loans have a fixed interest rate, set by the federal government, and are subject to passing federal guidelines for credit-worthiness. Repayment of these loans generally begins within 60 days after the funds have been completely disbursed; then your parent has up to 10 years to finish paying the loan off. There isn’t a grace period on PLUS loans; interest begins accruing immediately. The repayment amount includes both the principal and the interest.
Graduate PLUS Loans
A Graduate PLUS Loan is a
type of federal loan that allows you to borrow money to
finance your post-graduate education. Graduate PLUS Loans
are a lot like Parent PLUS Loans; however, unlike the Parent
PLUS Loan, the amount you can borrow with this loan is not
based on financial need. This loan has a fixed interest rate
set by the federal government and generally needs to be paid
back starting within 60 days after the funds have been
completely disbursed.
Private Student Loans
Private Loans are another
source of funds for college. These loans are typically
offered by private lenders, like banks, and are used when
you still have a gap between your cost of attending a
particular school and the financial aid and/or federal loans
that you have been awarded. Most people use private loans
when the government-based student and/or parent loans either
do not provide enough aid to cover the cost of college or do
not provide repayment options that are flexible enough for
them.
The Private Student Loan is one of the more popular private loans taken out to pay for college. These loans are available directly from banks, and the student is the borrower, although a parent is frequently asked to co-sign. Standard features of these loans might include flexible repayment options, greater loan limits and higher maximums. Private student loans may cost more than those you would receive from the federal government, so if you need to consider a Private Student Loan, you should shop around to find the best terms.
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