Basic information about student loans

For most families, paying for college includes borrowing. There are many ways to finance the costs of college, after your family has used savings or other investments. Those include student loans, parent loans, using home equity, personal loans, and even using credit cards (which we do NOT recommend!).

We’ll try here to help you understand the many types of student loans available to families with some brief definitions.

Federal Loans

There are many kinds of federally funded and federally backed (or insured) student loans.

Perkins Loan:

  • Based on “exceptional” financial need and awarded at the discretion of the college or university. Schools usually have a fixed – and modest – amount that they in turn allocate to students. And note: many schools have no Perkins loans.
  • Fixed 5% interest rate with no fees and a 9-month grace period (compared to 6 months on most other loan types). No interest accrues while the student is enrolled at least half-time.
  • Maximum award of $5,500 per undergraduate year with a cumulative loan limit of $27,500.

Federal Direct Loan Program

In the Direct Lending program, the loans are repaid directly to the federal government and will never be sold to another lender or bank. The Direct Loan Program offers the Stafford, PLUS, and GradPLUS Loans.

Stafford Loans

The Direct Lending Program from the Department of Education provides low-interest Stafford loans.

Federal Stafford Loans:

  • Are borrowed directly from the government
  • The student must be enrolled at least half-time
  • Interest rate is fixed at 4.66% for unsubsidized Stafford loans for undergraduate students; 4.66% for subsidized Stafford loans for the 2014-15 academic year.
  • Award limits are based on your year in school and your dependency status.
  • Repayment normally starts six months after leaving school (or after changing enrollment status to less than half-time)

There are two types of Stafford Loans: subsidized and unsubsidized.

Subsidized Stafford

  • The student and family must have financial need to qualify.
  • For Subsidized Stafford Loans for which the first disbursement is made on or after July 1, 2012, and before July 1, 2014, students will be responsible for the interest that accrues on the loan during the grace period. If a student does not pay the interest accrued, the interest will be capitalized to the principal amount of their loan when the grace period ends.

Unsubsidized Stafford

  • Financial need is not required to qualify.
  • Government pays no interest.
  • The borrower can choose to pay the interest each month while in school or allow it to capitalize (be added to the loan principal).

Parent Loans for Undergraduate Students (PLUS)

In addition to other financial aid, parents of undergraduate students may be able to borrow a PLUS loan to help pay for school.

  • The student must be a dependent undergraduate.
  • A simple credit check is required, but only for adverse credit history (bankruptcy, default on a previous federal student loan, etc.) – not for a particular credit score.
  • The student or family does not have to show financial need to qualify.
  • Parents may borrow up to the total cost of attendance, minus any other aid received.
  • The loan is not subsidized (the government pays no interest).
  • Repayment normally starts 60 days after full disbursement of the loan. However, borrowers may be able to defer payments while the student is enrolled.

Regardless of the type of education loans you and your family decide to use to finance your college education, they all have to be paid back with interest. Keep in mind the total cost of the loan as well as what the monthly payment will be when you enter repayment. Make sure to budget for these loan payments!


Student Loan Topics