Student loans can be a great opportunity for students who need them, but it’s absolutely vital to understand what you’re getting into before you borrow money. Some loans have some pretty unpleasant strings attached and you don’t want to get yourself into a situation where you immediately find your debt compounded by 20% interest.
Following is a guide to the most common loans available to students, with information regarding value, limits and, perhaps most importantly of all, the terms of repayment. If you’re already worried about repayment (or already in desperate need of advice), consider investing a few bucks in this acclaimed course on how to repay federal student loans.
The Stafford Loan (Subsidized)
We’ll talk a lot about subsidized and unsubsidized loans, so if you aren’t familiar with these terms please refer to this helpful page that has answers to pretty much any question you could ever ask. The Stafford Loan is far and away the common loan out there and any U.S. citizen is eligible (and many non-citizens are, as well) as long as you’re enrolled at least half-time.
The subsidized Stafford Loan maxes out at a grand total of $23,000, which goes a long way for public universities and colleges. Unfortunately, most of the money is not available until later on in your education, which makes sense from an investment point of view. You receive up to $3,500 your first year, with $1,000 increases your second and third year until you reach the maximum of $5,500 a year. Another unfortunate aspect of the Stafford Loan is that it is not available for graduate students.
Like many loans, you need to be prepared to start paying them off quickly. Stafford borrowers must make their first payment six months after graduating or falling below half-time status. On the other hand, you have 10 years to fully repay the loan. But it’s important to not get too anxious over loans, and this post on 7 steps for de-stressing about Federal Student Loans can help.
As far as interest is concerned, you don’t owe any until your first payment, which is really, really nice (in other words, the government covers interest until you graduate or withdraw). Basically, interest rates start at 6.8% for money loaned before July 1, 2008, and decrease in approximate 1% increments until bottoming out at 3.9% for money loaned after July 1, 2013. Either way, the interest rate is neither low nor high, and 6.8% can rack up a lot of debt quickly.
The main difference in the unsubsidized loan is that students can receive an extra $2,000 a year as long as it doesn’t exceed the cost of tuition. This brings the total loan availability up to $31,000 (but keep in mind the first $23,000 is subsidized).
If your parents are denied a PLUS loan, you can borrow A LOT more money, up to an extra $6,000-$7,000 a year, bringing the total available up to $57,500. Graduate students are eligible for unsubsidized Stafford loans and can borrow a whopping $20,500 a year, capping out at a grand total of $138,500.
Repayment terms and interest rates are almost identical to the subsidized Stafford loans; interest rates may vary by a half-percentage or full percentage point depending on when the money was actually loaned.
If you want to gain a deeper understanding of loans and their terminology, check out this free five-star course on Understanding Loans.
Parent PLUS Loan
Since you can get a significantly larger loan if your parents don’t quality for the PLUS loan, let’s take a closer look at it.
Any legal guardian, natural parent, stepparent, etc. can qualify for the loan if their dependent is an undergraduate who is a U.S. citizen (in some cases, non-citizen) who is enrolled at least half-time. Interestingly, the PLUS loan is NOT need-based, which can be problematic for parents who have poor credit or who truly do need the loan.
The PLUS loan is only limited by the cost of tuition; you cannot borrow more than the cost of tuition, but there is no limit to how much tuition the loan can cover.
It’s natural for a parent to be wary of loans, and for good reason: it’s a lot of money to borrow. But the more you know, the better prepared you’ll be to help your son or daughter. This Parent’s Guide to Making College More Affordable covers everything you can imagine, from scholarships to FAFSA to financial aid.
Repayment works differently for the PLUS loan. For starters, it beings as soon as the loan is fully disbursed and even if you qualify for a deferred payment plan, this will only buy you an extra 60 days unless a special request is granted to start repayment six months after the student graduates or withdraws. But like the Stafford loan, the parent has 10 years to fully repay the loan.
The interest rates are higher than the Stafford loan, too, ranging from 6.4% (for loans made after 2013) to a fixed rate of 8.5% (for older loans made under the FFELP).
The Perkins Loan is one of the most forgiving loans out there. It is reserved, however, for students who are in truly unique or desperate financial situations. As far as eligibility is concerned, the requirements are the same as the Stafford and PLUS loans.
Fortunately, the Perkins Loan is available to both graduate and undergraduate students, although the loan amounts vary accordingly. Undergraduates can borrow up to $5,500 a year for five years (meaning the loan maxes out at $27,500). Graduate students can borrow up to $8,000 for roughly eight years (the maximum is $60,000).
First of all, Perkins Loan borrowers have nine months (instead of six) to begin repaying the loan after they graduate or withdraw. While the payment options themselves are not as extensive as other loans, there are more options available for postponing payment.
The Perkins Loan boasts a reasonable fixed interest rate of 5%. And better yet, the government pays all interest until the nine month grace period is up (and if you apply for a postponement, the government continues to pay interest, as well).
But don’t forget about other basic (and more fun) college preparations. This article has some great college prep advice for new students.
Here’s where things get interesting. If you already qualified for a federal student loan, you are then automatically qualified for a consolidation loan. Makes sense.
Technically no limit exists, but the amount can only be determined based on your total loans and tuition. In other words, a consolidation loan is not really a loan; it’s a literal consolidation of your preexisting loans.
The repayment terms are unique to Consolidation Loans. Depending on your qualifications and total loan amounts, you may be eligible for a 30 year payment plan. However, this almost always results in a higher interest rate, which means you should (obviously) try to pay off these loans as quickly as possible.
I wish I could give you more advice about interest, but it varies by quite a bit and is completely dependent upon the interest rates of your other loans. These are usually averaged and then rounded up; this then becomes your fixed rate, which is why a 30 year repayment plan can quickly turn into a mountain of owed money.
Ideally you won’t have to take out a consolidation loan. This top-rated course on financial aid and how to successfully navigate the process can help you avoid having to.
As you would expect, private loans are not regulated by the federal government and the same rules DO NOT apply. Anyone is eligible (student, parent, etc.).
Of course, the limits are assigned by the lender, but it’s important to note that if you don’t qualify for federal loans, private loans can be a great option if you spend some time hunting around and doing your research. You just need to be wary of getting taken advantage of or of locking yourself into an unreasonable interest rate.
Interest rates can vary widely and, like I just mentioned, you need to pay close attention to these plans, as the interest rates can be deceiving. For example, they might start low and then quickly escalate. The payment plans also vary widely and you need to make sure this will be realistic for your goals. Keep in mind that private loans may not pay your interest the way the government does while you are still in school. In other words, you might be racking up huge interest fees for four or more years while you study.
State And Institutional Loans
State loans are obviously provided by the state, and institutional loans are provided by the school you are attending. Similar to private loans, the value, eligibility, interest and payment plans are completely dependent upon the state or institution. Still, you can often find a number of excellent loans this way by contacting your state’s education department or the financial aid office of your institution.
If money is a big issue for you and you’re having doubts about making college a reality, you might first consider this 20 minutes class on how to afford a college education without bankrupting yourself.