Stafford loan? Perkins loan? Private loan? Help!?

The big day has finally arrived…even more important than your acceptance letter to the school you have been idolizing since you were old enough to walk….your financial aid package! With angst you rip open the award letter only to find that inside is a jumbled mess of indecipherable numbers and words. Since you don’t have your Ph. D (yet!), you may need someone to help un-muddy the water.

There are many components and awards that you might see on your award letter, but one of the most commonly misunderstood, and potentially life changing, is student loans. Student loans account for more debt in our country than credit card. Yes, you read that sentence correctly.

Student loans have become an epidemic mainly due to mis-information, or simply lack of information. Student loans can sometimes be avoided, but often times they cannot be. If you find yourself in a situation where you need to take out a student loan, this information should help you make an informed decision.

Stafford Loans

Stafford loans are loans that are administered by your school, but are funded and guaranteed by the Federal Government under the William D. Ford Direct Loan Program. There are two types of Stafford loans: Subsidized and Unsubsidized. A subsidized loan’s interest is paid by the government, or deferred, while you are in school. Once you begin to repay your loan (six months after you graduate or drop below part-time) you will begin to repay the principal and interest.

An Unsubsidized loan is very similar in that you are not required to make a payment until you either graduate or drop below part time, but the interest on the loan does accrue while you are in school. Once you begin to repay, the accrued interest is capitalized and deed to your principle repayment amount. The Subsidized interest rate is 3.4%, and the Unsubsidized interest rate is 6.8%.

In general, the Subsidized loan is a better option if you need less than the Subsidized loan caps ($3500 Grade level 1, $4500 Grade level 2, $5500 Grade level 3 and above). Your eligibility for these loans is dependent on your completion of a Free Application for Federal Student Aid (FAFSA).

Perkins Loans

Perkins loan are also available through your school and are a great option if you qualify. These loans are administered by the individual school and are required to be repaid to your school. Repayment begins 9 months after your graduate. These loans are based on financial need, and carry a low 5% interest rate. You can borrow up to $5500 each academic year as an undergraduate student.

Parent PLUS Loans

Parent PLUS loans are actually loans that parents can take out on behalf of their children. The loans will be in the parent’s name and will require the parent to pass a credit check. PLUS loans are generally reserved as a last resort if the student is not able to receive enough financial aid through other means. Therefore, the maximum amount a parent can apply for would be the student’s cost of attendance minus the total amount of other aid awarded.

Private or Alternative Student Loans

These types of loans should be considered loans of last resort. Reasons being, the interest rates are generally higher than any other type of loan, they require a credit check of the student borrower, the interest rates are almost always variable, and the student may have to enter into repayment before he or she graduates.

However, if all other financial aid options have been expended, these loans are credible sources of money for college. They would be a much better financial decision than racking up a huge credit card bill to pay for your tuition. Private loans are offered through most major banks, Sallie Mae, and many other smaller loan providers. Your school’s financial aid office can give you guidance on where to apply for one of these loans if need be.

Student loans can be abused, but they also have their rightful place in the college landscape. If managed correctly, both during college and once you enter into repayment, they can be a useful tool as you work towards securing your college degree.

The Money for College project was started with one goal in mind:
to help people find ways to pay for college. MfCP is published by STRONGside, a career professional working in student financial services at a large (19,000+) research university. At MfCP you can find easy to understand explanations of financial aid awards, creative ways to make money for college students and working adults, and also sound financial literacy principles.