Not all student loans are created equal. In fact, each type of Federal student loan program was created to meet the needs of specific groups of students. Understanding the differences between the student loan programs will be crucial in helping you to plan your college costs accurately.
The two primary categories of student loans are those that are backed by a public government program, and those offered through private lenders. Generally, the loans offered through government programs will be much more favorable to student borrowers than private loans.
The most important Federal loan programs to consider are the Stafford Loan, the Perkins Loan, and the PLUS loans.
Stafford LoansStafford Loans are by far the most popular government loan program, since they offer loans on both a subsidized and unsubsidized level. In other words, you can use a Stafford Loan to help pay for college regardless of whether or not you have a financial need.
The Stafford Loan is available to both undergraduate and graduate students who are enrolled on an at least half-time basis. These types of loans are subject to maximum amounts by year (Freshman, Sophomore, etc.), as well as for all years combined.
Students utilizing this loan are guaranteed one low interest rate over the life of their loan, and are allowed to defer payment until six months after graduation. To the joy of many borrowers, Stafford Loans are not subject to credit approval.
Perkins LoansPerkins Loans are designed to help students with an extraordinary financial need, and many students will not qualify for the Perkins Loan's generous terms. Similar to the Stafford Loans, the Perkins Loans can be used for both undergraduate and graduate studies.
Perkins Loans are subject to a much lower annual and lifetime limit on borrowing, but are free from origination fees. Perkins Loans also receive a significantly lower interest rate. Additionally, the interest on these loans is paid by the government while a student is still enrolled in school.
PLUS LoansPLUS loans allow students or parents to borrow enough money to fund whatever need is not met by other financial aid programs. In essence, they allow you to completely pay for college with almost no money out of pocket today. However, your first payment may be due as early as 60 days from the loan's disbursement.
PLUS Loans are subject to noticeably higher interest rates than (7.90- 8.50%), and may be subject to origination fees of up to 4%. They also require good credit and are less flexible in their repayment options.
GrantsStudent loans are one of the most generous and easy to access programs in the US government. While this is of benefit to many seeking an education, it also presents a challenge once repayments must begin.
Before you max out your loan balances, make sure you understand the grants that are also available through the U.S. Department of Education (Pell Grants) and your home state. These grants are essentially gifts that never need to be repaid.