What are the different types of student loans?
College costs are at record highs, which is forcing many students and their families to finance high education via student loans. But there are several different types of loans and each comes with different terms. Check out HelpSaveMyDollars.com’s student loan guide below:
Direct Subsidized Stafford Loans:
These are the “best” types of loans. The government pays the interest while you’re in school. These loans are hard to receive – you must be in financial hardship.
The interest rate for direct subsidized Stafford loans is 6.8%, fixed.
Direct Unsubsidized Stafford Loans:
You pay the interest while you are in school, but you don’t start paying off the actual loan (the principal) until after school is over with. These loans are easier to receive than subsidized Stafford loans – all students are eligible, regardless of their financial situation.
The interest rate for direct unsubsidized Stafford loans is 4.5%, fixed, only if your loan was sent out between July 1, 2010 and June 30, 2011. For direct unsubsidized Stafford loans made between July 1, 2011 and June 30, 2012, the interest rate will be 3.4%, fixed.
Stafford loans (either unsubsidized or subsidized) are usually not large enough to cover your college tuition. These loans generally come in smaller amounts. Your school will determine the amount for the Stafford loan.
In order to receive any type of Stafford loan, you must fill out the FAFSA (Free Application for Federal Student Aid) form. Payment of any Stafford loan begins 6 months (known as the grace period) after college graduation or after you leave school. There is a 1% fee on Stafford loans made between July 1, 2010 and June 30, 2011.
Parent PLUS Loans:
PLUS (Parent Loan for Undergraduate Students) loans are for parents who want to fund their child’s college education. In order to be eligible for PLUS loans, the credit score of the parents is reviewed. Here’s how the amount of the PLUS loan is determined:
If you’re school costs $20,000 per year, but you were given $$5,000 in financial aid, you’ll be eligible (after a credit check) for a $15,000 PLUS loan.
Interest for a PLUS loan is fixed at 7.9% and parents will pay 4% of the loan amount as a fee, which is deducted each time the loan is sent out. Interest begins accruing from the moment the loan starts until the moment it is paid off in full.
It used to be that all Stafford loans and PLUS loans were available at private lenders under the Federal Family Education Loan (FFEL) Program. As of July 1, 2010, all Stafford and PLUS loans will now only be available via the U.S Department of Education from the Direct Loan Program.
Private Student Loans:
Private student loans are available at most major banks. However, these loans will usually have higher interest rates that are variable, which means they fluctuate and do not stay the same throughout the life of the loan. Interest rates for private loans are calculated on an index such as the Prime Rate or LIBOR (London Inter Bank Offering Rate) in addition to the consideration of the borrower’s and cosigner’s (if required) credit score. The higher your credit score is, usually the lower the interest rate will be on the loan.
Interest on private loans begins upon the disbursement of the loan.
Federal Pell Grants:
Federal Pell grants do not have to be payed back – it’s free money! The largest Pell Grant for July 1, 2010 to June 30, 2011 is $5,550. The amount of the grant is subject to a student’s financial situation and tuition costs.
Before considering private loans, search for scholarships (free money that does not have to be paid back) at websites like Fastweb.com and Cappex.com. Apply for your school’s financial aid program, since many schools are adding more scholarships, instead of loans, to their financial aid packages.
Final Thoughts on Student Loans…
Be careful before taking out thousands of dollars in student loans. Remember, student loans in most cases cannot be discharged in bankruptcy! You are stuck with them forever! Beware of the interest rate and the total amount of money you’ll end up owing on the loan. Also remember that you are investing in your future and your career. Don’t feel too overwhelmed by your student debt. You saw our recent article on the colleges whose graduates earn the most money – most of those schools were ivy league and schools that cost over $50,000 per year. College is an investment!