What are my student loan options?
There are several different types of student loans available to finance a college education. There are federal student loans and private student loans. Some loans are borrowed by the student and some by the parent.
The most important differences among student loans include:
- Federal vs. private
- Subsidized vs. unsubsidized
- Cost of the loan (e.g., interest rates and fees)
- Fixed vs. variable interest rates
- Loan discounts
- Loan limits
- Repayment options, including deferments and forbearances, death and disability discharges, repayment plans and loan forgiveness
The most popular loan for higher education is the Federal Direct Stafford Loan, a loan available to undergraduate and graduate students. The amount that may be borrowed each year is capped at levels well below the cost of most colleges. Undergraduate students may be eligible for subsidized and unsubsidized loans, while graduate students are eligible only for unsubsidized loans.
The Federal Direct PLUS Loan is made available to creditworthy parents of dependent undergraduate students (Parent PLUS) and to graduate students (Grad PLUS). Like a Stafford Loan, a PLUS Loan is subject to a fixed rate that adjusts each July 1. The interest rate on PLUS loans is higher than the interest rate on Stafford loans. A primary benefit of a PLUS Loan is that it can cover the full cost of education after it is reduced by Stafford Loans and other financial aid received by the student.
The Federal Perkins Loan was a 5-percent fixed-rate loan made directly by a college to the student using a revolving loan fund. The Federal Perkins Loan was reserved for those students who can demonstrate financial need and schools allocated the loans to those with the most need. The Federal Perkins Loan is no longer available to new borrowers.
Private student loans are made by banks, credit unions, state loan agencies and other financial institutions. They are not funded or guaranteed by the federal government and typically carry higher interest rates than federal or state loan programs, although your credit history and income will significantly influence loan terms. Private loans offer more flexibility and do not require the submission of a FAFSA, but may require a creditworthy cosigner. A home equity line of credit is one type of private loan used by some families to provide funds for college, but they should not be confused with private education loans which are generally unsecured.