College Concerns: Types of Student Loans
All student loans are not the same. Knowing how different loans work can help you choose what's right for you. Here's a brief overview of each loan type.
- Federal loans
The main student loan programs administered by the U.S. Department of Education are the William D. Ford Federal Direct Loan Program and the Federal Perkins Loan program.
The direct loan program consists of Stafford loans (for undergraduate students) and Direct PLUS loans (for parents and graduate students). The Federal Perkins Loan is a loan for undergraduate and graduate students.
Generally, you’ll have 10 to 25 years to repay your loans, depending on the repayment plan you choose.
- Direct Stafford loans
A Stafford loan is a low-interest loan for eligible students to help cover the cost of higher education at a 4-year college, university, community college or trade, career or technical school. Eligible students at participating schools borrow directly from the U.S. Department of Education.
How much you’re eligible to borrow with a Stafford loan is determined by your year in college as well as your expected family contribution. The interest rate on Stafford loans is fixed by the federal government and you can find the most current interest rates on the Department of Education website.
There are 2 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 and during grace periods and deferment periods. Your first payment is due 6 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 you receive your money through your repayment of the loan. You have the option to pay the interest while you are in school and during grace periods and deferment or forbearance periods, or you can allow it to accrue and be added to the principal amount of your loan. If you choose not to pay the interest as it accrues, this will increase the total amount you have to repay because you will be charged interest on a higher principal amount.
There are limits on the maximum amount you are eligible to receive each academic year and in total.
- Direct PLUS loans for parents
A PLUS loan for parents is designed for parents who want to help cover the cost of college without tapping into home equity, retirement savings or credit cards.
PLUS loans are made to parent borrowers regardless of income level. 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. For example, if you attended a school that cost $35,000 a year and you receive a financial aid package of $15,000 per year, 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 creditworthiness. Repayment of these loans generally begins within 60 days after the funds have been completely disbursed. However, for PLUS loans with a first disbursement date on or after July 1, 2008, the parent may defer repayment while the student is enrolled on at least a half-time basis and for an additional 6 months after the student ceases to be enrolled at least half-time. Interest accrues immediately and PLUS borrowers are responsible for all interest.
- Direct PLUS loans for graduates and
professional degree students
A PLUS loan for graduate and professional degree students is designed to help cover graduate education expenses. Before you can receive this loan, your school must have determined your maximum eligibility for direct subsidized and unsubsidized Stafford loans.
Graduate PLUS loans are made to student borrowers regardless of income level and have a fixed interest rate set by the federal government. A graduate PLUS loan is subject to passing federal guidelines for creditworthiness.
The repayment period for a graduate PLUS loan begins at the time you receive your money, and the first payment is due within 60 days. However, a graduate student PLUS borrower can defer repayment while the borrower is enrolled at least half-time and for an additional 6 months after the borrower is no longer enrolled at least half-time. Interest that accrues during these periods will be capitalized if not paid by the borrower during the deferment. Graduate PLUS borrowers are responsible for all interest that accrues.
- Federal Perkins Loans
A Federal Perkins Loan is a low-interest loan that is made with government funds to help you pay for both undergraduate and graduate school. This loan is awarded to students who show extraordinary financial need.
Perkins loans typically have a $5,500 per year maximum and a $27,500 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. You must repay this loan to your school or its agent.
- 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. Private loans can be used to help pay for tuition, books, living expenses and other education-related expenses.
Private student loans generally cost more than those you would receive from the federal government, so if you need to consider a private loan, you should shop around to find the best terms.
Interest that has accumulated on a loan but that has not yet been paid.
The addition of unpaid interest to the principal balance of a loan. When the interest is not paid as it accrues during periods of in-school status, the grace period, deferment, or forbearance, your lender may capitalize the interest. This increases the outstanding principal amount due on the loan and may cause your monthly payment amount to increase. Interest is then charged on that higher principal balance, increasing the overall cost of the loan.
A fee charged for borrowing money. Also refers to money that a financial institution may pay individuals for keeping their money in an account there (such as an interest-bearing savings account).
A contract option where the initial payment from the customer (usually due within 45 days of the contract date) is financed on the contract, thus allowing up to 180 days before the customer is obligated to send the first payment to the bank.
The amount of money borrowed or remaining unpaid on a loan.
A period during which your monthly loan payments are temporarily suspended or reduced. You may qualify for forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. During forbearance, principal payments are postponed but interest continues to accrue. Accrued unpaid interest will be added to the principal balance (capitalized) of your loan(s) at the end of the forbearance period, increasing the total amount you owe.
Category: Bank loan