Student loans, unlike scholarships and grants, are borrowed money that must be repaid with interest. Students are responsible for repaying their loans even if they don't complete their education or don't get a job after college graduation. Several types of student loans are available.
Stafford Loans
There are two types of Stafford Loans:
- Subsidized: Students must demonstrate financial need and be enrolled at least half-time. The federal government pays the interest while the student is in school.
- Unsubsidized: Students must be enrolled at least half-time. Students don't have to show financial need, but they do pay interest while in school.
The interest rate on a Stafford loan is a low fixed rate. The amount a student may receive depends on what year the student is in school and whether the student is an independent or dependent student.
The student will have to sign a promissory note that outlines the terms of the loan and will be required to participate in entrance counseling, a mandatory counseling session that explains the terms and conditions of the loan.
PLUS Loans
Commonly referred to as a parent PLUS loan when issued to a parent. To receive a parent PLUS loan, you must be the biological or adoptive parent (or in some cases, the stepparent) of a dependent undergraduate student enrolled at least half-time at an eligible school. Parents can borrow money from the US Department of Education to help pay for their student's education expenses. Borrowers who have an adverse credit history must meet additional requirements to qualify.
The maximum PLUS loan amount a parent can receive is the cost of attendance (determined by the college) minus any other financial aid received.
Consolidated Loans
Consolidation loans allow borrowers to combine multiple loans into a single loan with a single loan servicer. Typically, this results in a fixed interest rate based on the average of the interest rates.
Alternative Loans
Alternative education loans, also known as private loans, are made by private organizations such as banks, credit unions, and state-based or state-affiliated organizations, and have terms and conditions that are set by the lender. These types of loans are generally more expensive than federal student loans.
Many private student loans require payments while a student is still in school, but some do allow borrowers to defer (put off) payments while in school. Private student loans can have variable or fixed interest rates, which may be higher or lower than the rates on federal loans depending on borrower circumstances.
What You Should Know About Loans
Know borrowing basics and be sure to research loan options carefully. Here are some additional tips if you are considering borrowing money:
- Read all loan documents carefully.
- Understand the essential details: monthly payment, interest rate, and years to repay.
- Ask about any terms you don’t understand.
- Ask if there is a repayment grace period. Does the student have to pay the loan while in school?
- Ask if the interest rate is fixed or variable. Fixed rates will not change. Variable rates may go up or down depending on market interest rates.
- Ask about late fees.
- Don’t rush into making a decision.
- Consider the projected monthly payments and total payoff amount (including principal and interest).