Types of College Education Loans

There are several kinds of loans available to graduate and undergraduate students. Understanding the differences between them will help you apply for the loan best suited to your situation, and enable you to receive the most aid possible.

Stafford Loan

Stafford loans are the most common federal loans received by students. The funding for these loans is either provided by the federal government, through the Federal Direct Student Loan Program (FDSLP) or by financial institutions such as banks, credit unions, or savings and loan associations, through the Federal Family Education Loan Program (FFELP).

In order to apply for a Stafford loan, you must be a U.S. citizen or an eligible non-citizen, and must have received your high school diploma or equivalent. You must also be an undergraduate, graduate, or professional student, and be enrolled at least half-time in an accredited degree or certificate program. If you are in default on any other student loans, you are not eligible for a Stafford loan. To receive a Stafford loan, you must submit a FAFSA form, and sign a promissory note (a document stating you agree to repay the funds based on the terms of the loan).

Stafford loans can either be subsidized or unsubsidized. Subsidized loans are based on financial need, and have better terms. If your Stafford loan is subsidized, the loan's interest is paid by the government while you're still in school, and for the first 6 months after you graduate. Qualified applicants can even have their payments deferred (which means you can postpone making payments until later).

Unsubsidized loans are available to all students, regardless of financial need. If your Stafford loan is unsubsidized, you are responsible for paying the interest while you're in school. You do have the option, however, of having your payments deferred until after graduation. By deferring the payments, the interest is accumulated and added to the total loan balance (capitalized). In some cases, you may have the option to combine subsidized and unsubsidized loans.

Your school determines the amount you can borrow, based on your dependency status and academic standing. A 4% fee is taken from the total amount of money lent. The loan is distributed by your school in two installments. Any money left over will be given to you in the form of a check, or can be set aside. You must begin making payments on your loan 6 months after you graduate, or if the number of credit hours you're taking falls below half-time status. Depending on the amount of money borrowed and the plan received, you'll have somewhere between 10 and 30 years to repay your loan.

Federal Perkins Loan

Funds for Federal Perkins loans are provided by the federal government, and given to your school to distribute. The school, therefore, chooses who receives this type of loan. In order to apply for a Federal Perkins loan, you must be a U.S. citizen or an eligible non-citizen, and must have received your high school diploma or equivalent. You must also be an undergraduate or graduate student, and be enrolled at least half-time in an accredited degree or certificate program. If you are in default on any other student loans, you are not eligible for a Federal Perkins loan.

Federal Perkins loans are subsidized, meaning that the government pays the interest while you're still in school. Unlike the Stafford loans, there are no fees. The interest rate is fixed at 5%.

There is a limit to the amount that can be borrowed. Undergraduate students may be awarded up to $5,500 per year (to a maximum of $27,500), and graduate students may be awarded up to $8,000 per year (to a maximum of $60,000). The actual amount awarded varies, depending on financial need, any other forms of aid you're receiving, and the amount of funds available from your school.

It's important to submit your FAFSA form as soon as possible. Your school only has a certain amount to lend each year, and if you wait to submit your FAFSA, the amount of money you're awarded may be inadequate.

Federal Perkins loans are awarded in 2 installments over the course of the year. These installments may come to you in the form of a check or a credit to your account. Depending on the amount received, you will have up to 10 years to repay the loan.

Private Loans

Loans are also available from private sources, such as banks or credit unions. The details regarding these kinds of loans will vary depending on the organization and on your level of education. For these kinds of loans, a FAFSA form is unnecessary; the private organization will have its own application process. Private loans are more expensive than government loans, and should only be considered as a last resort.

Consolidated Loans

Many students are receiving money from several different federal loans at the same time. These students have the option of consolidating all of these loans into one big loan with one monthly payment. This can greatly simplify your financial planning, and can extend your payment deadline, allowing for lower monthly payments. Both the Federal Perkins and Stafford Loans are eligible for consolidation.

Be cautious when choosing to consolidate. By extending the length of your loan, you'll be making more payments and paying more interest. Also, if you received any borrower benefits from your initial loans (such as principal rebates or interest rate discounts), you might lose them by consolidating. Do your research and talk with your financial advisor to see if consolidating is the right choice for you.

If you decide to consolidate, you'll need to get an application from the appropriate lender department. You can apply to consolidate during your post-graduation 6-month grace period or anytime thereafter. The interest rates for consolidated loans are fixed, and never exceed 8.25%.

It's a good idea to apply for a loan as a student. Loans can significantly reduce the stress of paying for school, and can cover the costs of tuition, books, room and board, and more. Loans are a particularly good idea if those scholarships or grants don't end up coming through.

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