Federal Loans: An Overview
Of all the loan types, federal loans are the most desirable to have in your financial aid package. They offer fixed, low interest rates, and in some cases, are subsidized. Federal student loans include Perkins, Stafford, Parent PLUS, and Graduate PLUS Loans. All require you or a parent to fill out the FAFSA (Free Application for Federal Student Aid).
Stafford Loans have low, fixed interest rates but lower borrowing limits, so students often need to find funding from other sources to meet their needs. They come in two forms:
- Subsidized. No interest accrues on subsidized Stafford Loans while the student is enrolled, but the student must qualify by demonstrating financial need through the FAFSA.
- Unsubsidized. Interest does accrue on unsubsidized Stafford Loans while the student is enrolled, but nearly every student is able to borrow through the Stafford program regardless of need.
Parent PLUS Loans
Parent PLUS Loans are federal student loans for parents of undergraduate students. PLUS Loans have a fixed interest rate (6.41%) and higher borrowing limits than other federal loans. Parents can borrow up to the cost of attendance minus any financial aid received by the student. PLUS Loan applications are available from the school’s financial aid office. In most cases parents must pass a credit check or have a creditworthy relative or friend who agrees to endorse the loan and repay the loan if your parents fails to do so.
Graduate PLUS Loans are federal student loans for graduate or professional program students that have a fixed interest rate (6.41%) and higher borrowing limits than other federal loans. You can borrow up to the cost of attendance minus any financial aid. Make sure to borrow the maximum in Stafford Loans before using a GradPLUS Loan.
Federal student loans are guaranteed and regulated by the U.S. government and have fixed interest rates that are lower than most private student loans. Unlike private student loans, most federal student loans do not require a credit check. Private student loans are not subsidized by the government, and therefore are not regulated as closely. They may have variable interest rates and fees that are based on the credit profile of the borrower and the borrower’s cosigner. Borrowers should always maximize their federal loan options before using private loans.
How do I choose the right student loan for me?
You have many options when it comes to student loans for higher education. A few things to keep in mind:
- Fill out the Free Application for Federal Student Aid (or FAFSA). Without it, you won’t have access to federal student loans – many of which are not based on need or your income.
- Always use federal loans first, such as the Perkins, Stafford, and PLUS loans. They carry lower, fixed interest rates and often have more favorable terms than private (or alternative) loans.
- If you need to use private student loans, consider all of the costs. Private loans can have origination fees, different ways of compounding interest, and higher interest rates or APRs.
- Know your credit score. The lower your score, the higher your rate will likely be on a private loan. Most student borrowers will need a credit-worthy cosigner to be approved for a private student loan. Most private loans have variable interest rates (meaning they will fluctuate over time), while government-backed (or federal) loans have fixed interest rates and more lenient repayment terms.
Investigate your loan options carefully by considering the following:
- Total cost of the loan (after all of the interest and fees are taken into account)
- APR or annual percentage rate
- Borrower rewards (such as cash back or interest rate reductions for making on-time payments)
- Monthly payment
- Deferment options
What is a PLUS Loan?
The Parent Loan for Undergraduate Students, or PLUS, is a low-interest federally backed loan that parents can take out on behalf of their undergraduate children to pay for educational costs.
Should I choose GradPLUS or a private loan?
- You are comfortable with the possibility of interest rates increasing beyond the interest rate cap of the GradPLUS loan
- You have top-tier credit – at this point in time, borrowers with excellent credit will be charged less interest, but if interest rates continue to climb, this benefit decreases or disappears altogether
- You believe that there is very little possibility that you may use the deferment or forbearance options
- You plan to only borrow the loan for a short time
- You understand all of the options available to you for private loan financing – including the differences in rates, repayment periods and other loan terms
- You like the certainty that a fixed-rate loan provides
- If your credit is good, fair, or poor, your cost will likely be lower (Legislative Update: Effective October 1, 2011, any unpaid collection or account that’s been delinquent for 90 days or more is taken into consideration for PLUS loan eligibility–as will any default, bankruptcy, discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a Title IV debt within the past five years.)
- You like the protection that the greater deferment and forbearance options provide
- The repayment incentives offered may bring the repayment interest rate cost to less than 6.41%
I’m in a certificate or continuing education program, not a graduate program. Can I use a GradPLUS loan?
You must be enrolled at least half-time in a graduate or professional program leading to a master’s degree (or law, medical, or other professional degree) to be eligible to borrow a GradPLUS loan.