Everyone knows that college is an investment in your future, both in terms of obtaining more interesting work and in how much money you’ll make over the course of your lifetime. Unfortunately, few people can afford to pay for college outright, leading to the need for student loans. We compare the most popular types of college loans and offer a few warnings along the way.
Federal Student Loans
Federal student loans come through the federal government, although they are often originated through private lenders. Federal loans generally have lower interest rates than private loans, and in some cases the federal government will even pay the interest while you’re in school.
Before applying for loans, you must fill out the FAFSA – the Federal Application For Student Aid. In addition to qualifying you for government assistance, completing the FAFSA will help you to qualify for scholarships, reducing the amount of money you need to repay.
The best type of loan that is available to most students is a subsidized Stafford loan. Stafford loans are individual loans to you based on your estimated cost to attend college, minus any scholarships and grants you’ve received; the total amount you can borrow is based on your class year and dependent status. (Freshmen who are dependents of their parents, for example, can borrow up to $5,500 per year, while medical school students can borrow up to $40,500).
Stafford loans are either subsidized or unsubsidized; in a subsidized loan, the government pays the interest while you’re in school, while with an unsubsidized loan interest begins accumulating immediately. The interest rate on most Stafford loans is 6.8%; however, this will be as low as 3.4% for subsidized loans taken out in the 2010-2011 and 2011-2012 school years. Repayment on Stafford loans begins six months after the student leaves school, although payments may be made before then to avoid the interest on unsubsidized loans being capitalized.
Even better is a Perkins loan, which is reserved for students with exceptional financial need; this is another subsidized loan with an interest rate of 5%.
Parents of dependent students can apply for the federal Parent Loan for Undergraduate Students (PLUS); graduate and professional students can also take out PLUS loans to pay for their own education. These loans have a fixed interest rate of 8.5%, are not subsidized; they also have no grace period, with repayment beginning 60 days after the money is disbursed. Unlike the Stafford loans, PLUS loans also depend on a credit check; however, if the student’s parents are not eligible for a PLUS loan, this raises the limit on how much the student can borrow in unsubsidized Stafford loans.
Private Student Loans
When students have exceptional expenses, federal loans may not be enough to cover the full costs of attending college. A number of private student loans are available; these tend to have higher interest rates than federal loans (and of course are not subsidized). The best-known lender for private loans is Sallie Mae, but your local bank is likely to offer a student loan payment as well, and may offer better rates.
With few exceptions, student loans need to be repaid. Take out loans for as much as you need to pay for school, but no more; you don’t want to spend a decade trying to repay them! Additionally, in most cases student loans cannot be discharged through bankruptcy; they’re with you until you either die or pay them off. As always, borrow carefully!