This article is published in the 2017 I’m First Guide to College
There are many different types of loans, both for students and for parents to take on behalf of their student. Read on for the basics.
Federal Student Loans
Perkins Loans are need-based loans and are awarded by the financial aid office to students with the highest need. The interest rate is very low—5 percent—and you don’t make any loan payments while in school.
Subsidized Stafford or Direct Loans
Subsidized Stafford Loans are need-based loans with interest rates in the 4-6 percent range. The federal government pays the yearly interest while you’re in school. This is why they’re called “subsidized” loans.
Unsubsidized Stafford or Direct Loans
Unsubsidized Stafford Loans aren’t based on financial need and can be used to help pay the family share of costs. You’re responsible for paying interest on the loan while in school. You may choose to capitalize the interest. The advantage of doing this is that no interest payments are required. The disadvantage is that the interest is added to the loan, meaning that you will repay more money to the lender.
Grad PLUS Loans
This is a student loan for graduate students sponsored by the federal government that is unrelated to need. Generally, students can borrow Grad PLUS loans up to the total cost of education, minus any aid received. The advantage of this loan is that it allows for greater borrowing
capacity. However, we recommend that students consider lower-interest loans, such as the Subsidized Stafford or Unsubsidized loans prior to taking out a Grad PLUS loan.
Federal PLUS loans
The PLUS Loan program is the largest source of parent loans. Parents can borrow up to the full cost of attendance minus any aid received, and repayment starts 60 days after money is paid to college.
Private parent loans
A number of lenders and other financial institutions offer private education loans for parents. These loans usually carry a higher interest rate than PLUS Loans.
A small number of colleges offer their own parent loans, usually at a better rate than PLUS. Check each college’s aid materials to see if such loans are available.
Other Student Loan Options
Private student loans
A number of lenders and other financial institutions offer private education loans to students. These loans are not subsidized and usually carry a higher interest rate than the federal need-based loans. The College Board private loan program is an example of a private education loan for students.
Some colleges have their own loan funds. Interest rates may be lower than federal student loans. Read the college’s financial aid information.
Besides setting up scholarships, some private organizations and foundations have loan programs as well. Borrowing terms may be quite favorable. You can use Scholarship Search to find these.