Basics of Loans
Taken from I'm First Guide to College
Loans consist of money that you borrow to help pay for college, and must be repaid (plus interest). There are many different types of loans, both for students and for parents to take on behalf of their student. Read these for the basics:
Federal Student Loans
- Perkins Loans: Perkins Loans are need-based loans and are awarded by the financial aid office to students with the highest need. The interest rate is very low (5%) and you don’t make any loan payments while in school.
- Subsidized Stafford or Direct Loans: Subsidized Stafford loans are need-based loans with interest rates of 4-6%. The federal government pays the interest while you’re in school, which is why they are called “subsidized.”
- Unsubsidized Stafford or Direct Loans: Unsubsidized Stafford Loans aren’t based on financial need and can be used to help pay the family share of costs. You’re responsible for paying interest on the loan while in school. You may choose to capitalize the interest. The advantage of doing this is that no interest payments are required. The disadvantage is that the interest is added to the loan, meaning that you will repay more money to the lender.
- Federal PLUS Loans: The PLUS Loan program is the largest source of parent loans. Parents can borrow up to the full cost of attendance minus any aid received, and repayment starts 60 days after money is paid to college.
- Private Parent Loans: A number of lenders and other financial institutions offer private education loans for parents. These usually carry a higher interest rate than PLUS loans.
- College-Sponsored Loans: A small number of colleges offer their own parent loans, usually at a better rate than PLUS. Check each college’s aid materials to see if such loans are available.
- Private Student Loans: A number of lenders and other financial institutions offer private education loans to students. These loans are not subsidized and usually carry a higher interest rate than the federal need-based loans. The College Board private loan program is an example of a need based loan for students.
**Check out "Smart Borrowing for College" if you want more advice about loans!**
