Student Loans
There are several different types of student loans out there today, and choosing the right one can be challenging. Here is a quick guide to the more common types.
Federal Stafford Loans
Stafford loans are the most common type of loans taken out by students. Stafford loans are generally easy to get, have lower interests rates, come with a grace period and have flexible payment options. Any undergraduate or graduate student enrolled at least half-time in a participating college or university can apply for a Stafford Loan, regardless of need, by filling out the FAFSA form. The money from the loan is disbursed through the school and is to be used for tuition, fees, room and board, and other education-related costs. Interest rates on the loans are adjusted once a year on July 1, and interest rates are capped at 8.25%. For loans issued before July 1, 2006, the interest rate is variable and is adjusted every year on July 1. Effective July 1, 2006, all loans issued with have fixed interest rates, pegged at 6.8% for loans issued from July 1, 2006 to June 30, 2007. To learn more about changes being made to the federal loan programs, click here.
There are yearly limits to Stafford Loans, as shown below.
Loan Limits for Stafford Loans
| Dependent | Annual loan limit |
| Freshman | $2,625 |
| Sophomore | $3,500 |
| Junior or senior | $5,500 |
| Independent | Annual loan limit |
| Freshman | $6,625 |
| Sophomore | $7,500 |
| Junior or senior | $10,500 |
| Graduate or professional | $18,500 |
| Undergraduate dependent lifetime limit | $23,000 |
| Undergraduate independent lifetime limit | $46,000 |
| Graduate or professional lifetime limit* | $138,500 |
*Exceptions may apply to certain graduate students.
There are two varieties of Stafford Loans, subsidized and unsubsidized.
Subsidized Stafford Loans
For Subsidized Stafford Loans, the government pays interest fees while you are enrolled in school up until 6 months after you graduate or drop out, and during authorized deferments. After that, you must pay for interest and pay down the balance of the loan, generally within 10 years.
Unsubsidized Stafford Loans
Unsubsidized Stafford Loans generally have the interest capitalized, or added to the total balance, meaning that when you begin paying off the loan, you can have a significantly larger amount to pay off than you originally borrowed. Even though you have to pay the interest on the unsubsidized loan, the loans have relatively low interest rates compared to student loans outside of government programs, and much, much lower interest rates than other possible ways to pay, like credit cards. Avoid at all costs paying college tuition with a credit card.
Interest rates on loans issued after July 1, 2006 have a fixed rate of 6.8%. This rate will be charged to subsidized loans during repayment.
PLUS Loans
PLUS Loans are loans that can be taken out by parents for their dependent undergraduate student. Parents can apply if they have good credit and if the student the loan is being taken out for is enrolled at least half-time in a participating institution.
There are two types of PLUS Loans, one through the Federal Family Education Loan (FFEL) Program, and the other through the William D. Ford Federal Direct Loan (or Direct Loan) Program. FFEL funds come from, or is originated by, a bank or credit union, and the applicant chooses his or her lender. Direct loans are originated by the government.
PLUS Loans are popular because of their government subsiziation, low interest rates (capped at 9.00%, adjusted every July 1 for loans issued before July 1, 2006, and fixedfor loans issued after July 1, 2006, currently at 7.9% for loans issued in 06-07), flexible payment options and grace period. Interest begins accruing when the first disbursement is made; parents begin paying principal and interest 60 days after the loan is fully disbursed, even if the student is still in school. Repayment usually takes 10-30 years, depending on the plan. In case of the borrowing parent's death, the loan is forgiven.
Applications and promissary notes for PLUS Loans can be obtained at your college's financial aid office.
Perkins Loans
Perkins Loans are loans provided to students with exceptional financial need. It is awarded by the financial aid administrator at your school under a federal program. Interest rates are the lowest among the loans listed here, and interest is subsidized while the borrower is in school. Up to $3,000 a year (up to 5 years) can be borrowed for undergraduate studies, and $5,000 a year (for 6 years) can be borrowed for grad school. In order to be eligible, you must apply for a Pell grant.
Private Loans
Private loans are loans not from a government program. Banks, credit unions and other financial institutions originate the loans. These loans tend to have higher interest rates (recently in the 9-11% range) and are not subsidized. Loan repayment is generally 10 years, but check with the lender for details. There are typically two options for repayment, one that begins within a short period (1-2 months) after disbursement of funds, and the other where no payments are made while in school. This means that all interest charged is capitalized, or added to the total balance of the loan, so the loan continues to grow as long as you are enrolled, even if no other funds are borrowed. There are frequently added fees to the loan if you choose to capitalize the interest.
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