Student loans are borrowed money designed to help students pay for college tuition, books and living expenses. They are legal obligations and must be repaid, with interest. Student loans typically take years after graduation to pay back and can range in the six-figures, depending on the school or program. As daunting as they can seem, data compiled by the National Center for Education Statistics show that the majority of college students borrow to pay for their education: Of the two-thirds of four-year undergraduate students who borrowed to pay for college during the 2010-11 academic year, their average debt load was $26,600 by the time they graduated.
Student loans are available in the form of federal loans or private (alternative) loans, and it is important to exhaust all federal grant and loans available to you before considering a private loan, as grants do not have to be paid back, and as federal loans are backed by the U.S. government and are available directly through your school or through banks and student loan lenders. Further, federal loans typically have lower interest rates, multiple repayment options, longer repayment periods, and much easier credit requirements than private loans.
- The Federal Perkins Loan
The Federal Perkins Loan is made through participating schools to undergraduate, graduate and professional degree students enrolled full-time or part-time. It is offered to students who demonstrate financial need and offers a very low fixed rate of 5 percent. Depending on the level of need, undergraduates can borrow up to $4,000 and graduate students up to $6,000. Unlike other federal loans, these loans are disbursed from the school, and the loans are repaid to the school.
- Stafford Loans
Stafford Loans are the most common type of federal student loans, and they are for undergraduate, graduate and professional degree students enrolled as at least a half-time students. There are two types of Stafford Loans: subsidized and unsubsidized. To be eligible for a subsidized Stafford Loan, the borrower must demonstrate financial need. As such, the U.S. Department of Education will pay (subsidize) the interest that accrues on subsidized Stafford Loans during certain periods. Conversely, financial need is not a requirement to obtain an unsubsidized Stafford Loan, and the borrower is responsible for paying the interest that accrues on these loans. The loans carry a fixed interest rate.
For loans first disbursed on or after July 1, 2008, the interest is 6 percent for subsidized Stafford loans for undergraduate students and 6.8 percent for unsubsidized Stafford loans for undergraduate and graduate students.
These are the interest rate reductions for subsidized Stafford loans:
When the first disbursement of a loan is made on or after July 1, 2008, and before July 1, 2009, the interest rate on the unpaid balance is 6 percent
For those made on or after July 1, 2009, and and before July 1, 2010, it is 5.6 percent
For those made on or after July 1, 2010, and before July 1, 2011, it is 4.5 percent
For those made on or after July 1, 2011, and before July 1, 2012, it is 3.4 percent (Note: This rate was set to expire July 1, 2012 but has been extended through 2013.)
- The Parent Loan for Undergraduate Students (PLUS Loans)
PLUS loans are loans intended for the parents of dependent undergraduate students who are enrolled at least half-time. Parents can obtain such a loan to help pay the cost of education for their dependent undergraduate children, though graduate and professional degree students may also obtain PLUS Loans to help pay for their own education.
- Consolidation Loans
Consolidation Loans allow student or parent borrowers to combine multiple federal education loans into one loan with one monthly payment.
Federal loans are made through either the William D. Ford Federal Direct Loan (Direct Loan) Program or the Federal Family Education Loan (FFEL) Program, each a program of the U.S. Department of Education.
Loans made through the William D. Ford Federal Direct Loan (Direct Loan) Programare referred to as Direct Loans. Eligible students and parents borrow directly from the U.S. Department of Education at participating schools, and Direct Loans include subsidized and unsubsidized Direct Stafford Loans (also known as Direct Subsidized Loans and Direct Unsubsidized Loans), Direct PLUS Loans, and Direct Consolidation Loans. These loans are repaid directly to the government.
Loans made through the Federal Family Education Loan (FFEL) Program are referred to as FFEL Loans, and under this program, private lenders provide funds that are guaranteed by the federal government. FFEL Loans include subsidized and unsubsidized FFEL Stafford Loans, FFEL PLUS Loans and FFEL Consolidation Loans. These loans are repaid to the bank or private lender that made the loan.
Direct PLUS Loans first disbursed on or after July 1, 2006 have a fixed interest rate of 7.9 percent, and FFEL PLUS Loans first disbursed on or after July 1, 2006 have a fixed interest rate of 8.5 percent.
It is important to note that whether you (or your parents) receive a Stafford or PLUS Loan depends on which program the school you attend participates in. In order to receive a federal student loan, you must first complete and submit the FAFSA, the Free Application for Federal Student Aid, and a guide to that application can be found here. These are the application deadlines for completing and submitting the FAFSA, including state-specific details.
Private, or alternative, student loans are specialized college student loans that offer extra funding to cover any education-related expenses, such as tuition, books, transportation and room and board. These loans should be considered after all federal student loans, grants and scholarships have been exhausted, and borrowers should first review their school's preferred lender list for private loans, if one is available.
To apply for a private loan, the borrower must be a U.S. citizens or a permanent resident, and be enrolled at least half-time in a four-or five-year degree program. It is recommended that a borrow has a co-signer, as it will improve the chances of approval and a lower interest rate. The interest rate on a private student loan is a combination of the Prime or LIBOR rate (the Index rate) plus or minus a margin, and the private student loan rates will fluctuate as the Index rate changes. One advantage of the private loan is that there are no principal or interest payments until six months after graduation. Also, these loans do not have application deadlines.
Once the borrower has applied for the loan and received conditional approval, he or she will complete a promissory note and submit documentation to verify the information on the application. Once the requested documents are returned, it should take just a few weeks for the check to be sent to the borrower's school, which will be relayed to the student via the school's office of financial aid.
These sites offer some very good comparison charts to help you decide on a potential lender, including details on the limits of the loan, rates, fees and terms:
It is important to note that the fees charged by some lenders can increase the cost of the loan substantially, and a loan with a relatively low interest rate but high fees can end up costing more than a loan with a somewhat higher interest rate and no fees.
For more help deciding among loans, see this Student Loan Comparison Calculator, which helps determine how much it will cost in the long run to take out different loans, including the federal Stafford and PLUS loans as well as private loans.
The government offers loans to those in select fields or with distinguishing criteria:
- The Health Professions Student Loan program provides long-term, low interest rate loans to full-time, financially needy students to pursue a degree in dentistry, optometry, pharmacy, podiatric medicine, or veterinary medicine. Apply for this loan at the student financial aid office of the school where you are or intend to be enrolled.
- The Nursing Student Loan program provides long-term, low-interest rate loans to full-time and half-time financially needy students pursuing a course of study leading to a diploma, associate, baccalaureate or graduate degree in nursing. Apply for this loan at the student financial aid office of the school where you are or intend to be enrolled.
- The Loans for Disadvantaged Students program provides long-term, low-interest rate loans to full-time, financially needy students from disadvantaged backgrounds, to pursue a degree in allopathic medicine, osteopathic medicine, dentistry, optometry, podiatric medicine, pharmacy or veterinary medicine. Apply for this loan at the student financial aid office of the school where you are or intend to be enrolled.
Repayment and Consolidation
This official site has info. on paying back federal student loans, including repayment plans and financial aid calculators and Public Service Loan forgiveness, under which borrowers may qualify for forgiveness of the remaining balance due on their eligible federal student loans after they have made 120 payments on those loans while employed full-time by certain public service employers.
Student Loan Repayment Calculator – College Board