The Four Most Common Student Loans (and How to Choose One)

by Francine L. Huff

Rising tuition costs are making it more difficult for many people to pay for a college education. Many have turned to loans. Almost two-thirds of recent graduates have student loan debt, according to a February 2006 white paper, Addressing Student Loan Repayment Burdens, by the Project on Student Debt and the American Enterprise Institute. The following guide helps explain some of the more popular student loan programs.

1. Federal Student Loans

The Stafford Loan is one of the most popular student loan programs used to pay the cost of undergraduate and graduate college degrees. To be eligible for a Stafford, as well as many other student loans, grants, and scholarships, you must complete the Free Application for Federal Student Aid (FAFSA), either online or on paper. Stafford funding may be provided by the federal government through the William D. Ford Direct Loan program, or by a financial institution that participates in the Federal Family Education Loan program.

Stafford Loans can be subsidized or unsubsidized, based on need. If you receive a subsidized loan, the government pays the interest while you're in school and for the first six months after you leave school. If you receive an unsubsidized loan, you are responsible for paying the interest. Independent undergraduates (those not getting money from their family) can borrow more than dependent students, and graduate students can borrow more than undergraduates.

2. Need-Based Loans

Perkins Loans are awarded based on need. Perkins Loans are funded by the federal government and administered by individual schools. You repay Perkins Loan funds through your school. Depending on how much you borrow, you may have up to 10 years to repay the loan. Undergraduates can borrow up to $4,000 a year and graduate students can borrow up to $6,000 a year. Individual awards are determined by the school. Like other federal loans, the amount of loan for which a student is eligible depends on other financial aid received.

3. PLUS Loans for Parents and Graduate Students

The PLUS loan program allows parents to borrow money to help pay for their dependent children's educational expenses. They can use the funding to pay for costs that aren't covered by other financial aid the student receives. Parents can apply for a PLUS loan regardless of their income-to-debt ratio and FICO score, but parent credit history should be free of defaults, bankruptcies, and delinquent bill payments.

About 80% of people who apply for PLUS loans are approved, according to FinAid.org. Graduate and professional students also can borrow through the PLUS loan program, and can receive a deferment on repaying loans while in school. Parents are also eligible for a loan deferment as long as their child is in school. The interest, however, continues to accrue and is added to the principal if it is not paid during periods of deferment.

4. Private Loans

Anyone can apply for a private student loan. However, they have higher interest rates than federal loans. Lenders will check your credit to determine what the interest rate will be for a private student loan. Generally, private loans also have application fees, so this could increase the cost of borrowing.

Despite the higher costs of private loans, many students (and their parents) find themselves applying for private loans because they're unable to pay for all of their education expenses with loans from the federal financial aid programs. It's important to shop around for private loans to compare the fees and interest rates. Generally, you'll want to find a loan with an interest rate that is tied to the London Interbank Offered Rate (LIBOR).

Student loans are often part of the overall financial aid package that students receive. A financial aid package can also include grants and scholarship, which don't have to be repaid as long as all awarding criteria are met, and work-study, which requires that students work to help pay educational expenses.

Sources:
FinAid
Federal Student Aid
National Center for Education Statistics

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.