Planning for college can involve a crash course in the world of grants, scholarships, and student loans. You might be wondering if all student loans are created equal, but the answer is no. Some students’ loans have much lower interest rates or interest-free grace periods that can make an important difference in how much you have to pay back once you are a successful college graduate.
All student loans are meant to help students pay for their tuition, books, and living expenses while they study. In most cases, federal student loans are preferable to private loans because they offer better interest rates and repayment terms. In order to apply for federal student loans, it is necessary to fill out a FAFSA (the Free Application for Federal Student Aid) online. Be sure to make yourself familiar with the particular college, state, and federal deadline dates so that you don't miss them.
The best federal student loan is the Perkins loan. Perkins loans are reserved for students who demonstrate exceptional financial need. Perkins loans are subsidized, which means that they do not accrue interest while the student meets certain criteria, in this case, when enrolled at least half time in school, as well as for a nine-month grace period following graduation. At this point, Perkins loans begin to accrue interest at a 5% rate. Perkins loans have the added benefit of qualifying for Federal Loan Cancellation, a program where graduates who go on to work in low-income schools, math, science, or bilingual education, or as Peace Corps Volunteers, are eligible to have a portion of their loan forgiven for their service.
The second best type of student loan is the Stafford Loan. Direct Stafford Loans are borrowed from the U.S. Department of Education, and disbursed through your college's financial aid office. There are two types of Direct Stafford Loans: subsidized and unsubsidized. Students who demonstrate financial need on their FAFSA are eligible for Direct Subsidized Loans. Similar to the Perkins Loan, students are not charged interest while they are in school and for a short period following graduation. All students are eligible for Direct Unsubsidized Loans, which begin to accrue interest as soon as they are disbursed. Interest rates vary by level of education, but range from 3.4%-6.8% for both subsidized and unsubsidized loans.
Ideally, students would be able to cover their school expenses using only Perkins and Stafford Loans, but there are limits to how much a student is allowed to borrow each year. For those who need further financial assistance, a federal PLUS loan can help make up the difference. PLUS loans allow parents (of undergraduates) and students (at the graduate level) to take a loan up to cover the remaining cost of school attendance. All PLUS loans are unsubsidized and have the highest interest rate of the three types of federal student aid (around 8%-8.5%, with a disbursement fee as high as 4% of the loan), but the PLUS loan can still be a better deal than the alternative, which is private student loans. Those who are interested in private student loans will need to consider this type of loan on a case-by-case basis, as their interest rates, limits, fees, and terms vary by lending institution.