Knowing the ins and outs of student loans is important if you're considering taking some on to pay for your or your child's education. Anymore, college is difficult to pay for without the assistance of student loans; in fact, in the 2005 to 2006 academic year, Americans took out more than $78 billion dollars in federal and private student loans. Before beginning any borrowing, you should understand, at least, the different types of loans that you could receive as a student.
Every student's quest to secure student loans should begin with federal loans, especially the Stafford loan and the Perkins loan. The Stafford is available to everyone regardless of their financial need, while the Perkins loan is available only to those students who demonstrate the greatest financial need. Some parents are eligible for Parental Loans for Undergraduate Students, or PLUS, loans.
To apply for federal loans, students should fill out the Free Application for Federal Student Aid, also called the FAFSA. Although the form is complicated and takes a while to fill out, it's free and you can complete it online if you want to. When you're finished, you're eligible for federal loans, which can save you a lot of money on interest.
The benefit of federal loans is that the interest rates and borrowing limits are set and guaranteed by the U.S. government. Additionally, federal loans have a lot of different repayment and deferment options if you have difficulty repaying them after you graduate.
Private or alternative loans should really only be considered if you cannot cover the cost of attending school with federal loans. Lenders establish the interest rates themselves, and those rates are by no means set in stone, which means they can change dramatically from year to year and from borrower to borrower.
And because the government does not guarantee private loans, borrowers do not always have the same benefits, such as deferment or forbearance, which they would receive from federal loans. The bottom line: avoid private loans if you can.
Federal and private loans alike can be classified as subsidized or unsubsidized. The difference between the two is that subsidized loans do not accrue interest while you are enrolled in college while unsubsidized loans begin accruing interest as soon as you receive the money.
The bottom line: get subsidized loans if at all possible.