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Student Loans

Student Loans

First the basics: A student loan is a form of financial aid that must be repaid, either with or without interest. A scholarship or a grant is a form of aid that does not have to be repaid.

Let's focus on student loans.

Education loans can be grouped into three main categories:

  • Student loans, like the Stafford and Perkins loans,
  • Parent loans, like the PLUS loans, and
  • Private student loans, also called alternative student loans

Federal law establishes maximum interest rates and fees lenders are allowed to charge for federally-guaranteed loans. Private loans are different; the lender can charge whatever the market will bear.

We'll start with the two federal student loans: The Stafford loan and the Perkins loan.

Stafford Loan

Stafford loans are not based on credit approval since they are federally-backed loans.

The Stafford loan comes in two forms: Subsidized and unsubsidized.

A subsidized loan is a loan where the government pays the interest on funds borrowed while the student is in school. In simple terms, that means no interest accrues while the student is enrolled in school. If you borrow $2,000, the balance of the loan is still $2,000 when you complete school.

Interest starts accruing immediately on unsubsidized loans, but the student is still not required to make payments while still enrolled in school.

Subsidized loans are granted based on financial need. A student who does not qualify for a subsidized loan can still qualify for an unsubsidized loan.

Borrowing Limits

Stafford Loan limits are based on whether the student is a dependent and his or her year in school:

  • Freshman year: $3,500 if dependent, $7,500 if not a dependent
  • Sophomore year: $4,500 if dependent, $8,500 if not a dependent
  • Junior year or above: $5,500 if dependent, $10,500 if not a dependent
  • Graduate years: $20,500 per year regardless of dependent status

Stafford Loans are currently capped at $138,500 lifetime per student.

Students who qualify for a Stafford loan are guaranteed the same interest rate over the life of the loan, and can defer making payments until six months after they graduate.

Perkins Loan

A Perkins loan is intended to help students with unusual financial needs; many students do not qualify for Perkins loans. Perkins loans can be used for undergraduate and graduate expenses.

While the Perkins loans allow a student to borrow less in total than a Stafford loan, the terms are much more generous, including lower interest rates, longer grace periods, lower fees, and a variety of repayment options.

All Perkins loans are subsidized loans; no interest accrues until graduation, and there are no loan origination fees.

Repayment options are also generous. Students can wait nine months before starting to repay Perkins loans; the minimum payment is $40 and the loan must be repaid in ten years. But, if the student becomes a teacher at a public school, the National Defense Education Act forgives a percentage of the loan for each year spent as a teacher.

Borrowing Limits

The maximum a student can borrow under a Perkins loan is based on whether they are enrolled as an undergraduate or a graduate student. Undergraduate students are allowed to borrow a maximum of $4,000, for a total amount of $20,000. Graduate students can borrow up to $6,000 a year for a combined total amount − including undergraduate and graduate Perkins borrowing − of $40,000. If a student borrows $10,000 as an undergraduate, he or she is allowed to borrow an additional $30,000 as a graduate student.

PLUS Loans

PLUS loans allow students − or their parents − to borrow money for educational expenses not covered by other financial aid programs, including loans. In theory, using a combination of loans, a student may be able to attend college without any out of pocket costs.
But funds borrowed will have to be paid back; the first payment on a PLUS loan is typically due about sixty days from the date of loan disbursement; in other words, a PLUS loan could be considered a "pay as you go" loan.

PLUS Loans typically come with higher interest rates and higher original fees (sometimes up to 4% of the amount of the loan). PLUS loans also are subject to credit checks and offer less flexible repayment options.

In short, think of a PLUS loan as more like a traditional loan for other purposes.

PLUS loans do not have borrowing limits; the amount borrowed is simply based on the amount needed to cover educational costs. There also is no lifetime cap on PLUS loans; students can borrow as much as they qualify for (and are willing to repay).

Private Student Loans

Private student loans are sometimes called Alternative Education Loans. Private loans are offered by private lenders; eligibility for private student loans is based on credit history, ability to repay, etc − basically the same criteria as used for any other type of loan.

While private student loans tend to have higher interest rates than federally-backed education loans, they are often cheaper than credit card debt.

In general terms, borrow from federal programs first; turn to private student loans when you have exhausted other, less expensive options.

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