courtesy of Omar Omar on Flickr!
As I receive college acceptance (no denials yet!) letters and plan my future studies, I can feel student loans creeping towards me. While I am applying for scholarships and already have the FASFA filled out, there’s a very good chance I’ll be taking out at least some loans. To learn more about them (yeah, there’s more than one type!), I thought I would write up this post detailing the typical student loans available.
Federal Stafford Loan
- These loans are administered or backed by the US government and you don’t have to pay anything on them while you’re still in school. The main benefit is a much lower interest rate than what you would pay on a private loan. There are 2 variations of Stafford loans.
- Federal Family Education Loan Program (FFELP)- is handled by typical lenders like Sallie Mae or Chase bank. The US government basically says “Hey there Sallie, we’ll guarantee this loan, so go ahead and give the kid a low interest rate.”
- Federal Direct Student Loan Program (FDSLP)- is handled directly by the federal government. You are in essence saying “Hey Uncle Sam, let me borrow money!” Uncle Sam replies “OK, fantastic!”
Not to make things more confusing, but there are two flavors of Stafford loans:
- Subsidized- while you are in school, the government pays your interest for you.
- Unsubsidized- you’re responsible for all interest, although you don’t have to pay it until you graduate
To receive a subsidized loan, you must show financial need. Most students whose parents make over $100,000 per year won’t receive one, although some do. If your parents make under $50,000, then you have a pretty good shot.
Luckily, all students are eligible for unsubsidized loans, regardless of their parents’ incomes.
Federal Perkins Loan
- administered by each university through funds the government provides. This loan is only provided to those with extreme financial need and each college has their own definition of needy. The main benefits:
- subsidized, so no interest will accumulate until you start repayment
- relatively low interest rate of 5%
- allows ten years for repayment
Parent PLUS Loan
– Like the name implies, this loan is actually in your parent’s name. You can agree to pay it off of course, but if you don’t, your parent will be responsible. Like Stafford loans, these are issued either directly by the government or by banks and credit unions. Other details: (the first one only applies to loans made after July 1st, 2008)
- Repayment begins either 60 days after you get the money or 6 months after you cease to be enrolled at a university on at least a part time basis.
- Not subsidized, so interest is accruing (adding up) throughout your time in school
- If your parent has a bad credit history, they may be denied
- You can borrow whatever amount isn’t covered by other forms of financial aid (limitless basically)
Private Education Loan
- This type of loan is provided by private banks and credit unions. The interest rate is higher than what the federal government charges. Keep in mind:
- interest rates and fees will be determined by your credit score (or your cosigner)
- having a parent with good credit to cosign should lower your rate
- almost absolutely NO WAY to get rid of these loans, even through bankruptcy
- some allow up to 25 years for repayment
Just in case it isn’t clear, you should exhaust all other loan options before taking out a private student loan.
While student loans can provide the means necessary to achieve a degree, they are still a debt that must be repaid. Anytime you’re considering taking one out (even federal ones), always ask “Can I realistically expect to pay this back?” If the answer is no, then do not do it! This is my plan of attack and I’m hoping planning to exit college with minimal loans.
