What You And Your Parents Should Know About College Financial Aid - Part 2: Loans

College Admissions


One of the most daunting parts of the college application process can be the search for financial aid. The question of how you and your parents will be able to afford college can often seem to be one that can’t be answered easily. However, by arming yourself with knowledge about the types of financial aid available, the requirements each type has, and what you can do to improve your financial aid prospects, you’ll easily be able to win the financial aid battle.

In part 1, we talked about the different types of financial aid available. Today, we'll talk about loans, give specifics on the different types available, and give you some pointers on how to choose the best one for your situation. In parts 3 and 4, we'll talk about grants and scholarships, and what you and your parents can do to help lighten the college cost load.

What are the differences between each type of loan?

While scholarships and grants are typically easy to understand and apply for, loans are another story altogether. Understanding the different types of loans available is one of the most important steps you can take as you put together a payment plan for your college education.

Loans come in two main varieties: Federal and private.

Federal Loans

Federal loans are the loans most students rely on to finance college costs. They are financed by the U.S. Government; most are administered through the Federal Direct Student Loan Program (FDSLP), also known simply as “Direct Loans.” These loans are provided directly to the students and their parents, without going through a third party. There are three types of federal student loans: Stafford Loans, Perkins Loans, and PLUS Loans.

  • Subsidized Stafford Loans are available to students with demonstrated financial need. This need is determined by the information you provide in the Free Application for Federal Student Aid (FAFSA), which you can find online at www.fafsa.org or request from your college’s Financial Aid Office. One of the most important advantages to the Subsidized Stafford Loan is that the government pays for the interest on the loan while you are in school, and so you do not start accruing any interest on it until after you graduate.
  • Unsubsidized Stafford Loans are available to all students, regardless of financial need. However, with Unsubsidized Stafford Loans, you are responsible for all the interest on it, and must either start paying it while you are in school, or capitalize the interest (which means that the interest payments will be added to your loan balance, increasing the amount and cost of the loan).

Stafford Loans, both subsidized and unsubsidized, have low interest rates, which make them a particularly attractive option when considering them as part of your financial aid package. You can also receive both subsidized and unsubsidized loans at the same time, and there is a 6-month “grace period” that starts immediately after you graduate, to give you time to find a job before you are required to start making payments on the loans. The amount that you can borrow through the Stafford Loan program is limited (go to the Federal Student Aid website to see the borrowing limits during each of your four years of school) which means that, although it’s likely that you will see Stafford Loans as part of your financial aid package, that’s not all you will see. You may also see either one of the following two types of federal loans.

The amount that you can borrow through the Stafford Loan program is limited (go to the Federal Student Aid website to see the borrowing limits during each of your four years of school) which means that, although it’s likely that you will see Stafford Loans as part of your financial aid package, that’s not all you will see. You may also see either one of the following two types of federal loans:

  • Perkins Loans are awarded to students demonstrating exceptional financial need. They are given to students through the undergraduate institution they attend, and are known as a campus-based program, with the school acting as a lender and lending money from a small pool given to them by the federal government. Perkins Loans are similar to subsidized Stafford Loans, because the government pays the interest on the loan while you are in school, and they also pay it for a 9-month “grace period” after you graduate. They have low interest rates, and a 10-year repayment period. They also have limits on how much can be borrowed per year and overall (see the Federal Student Aid website for a list of maximum loan amounts).
  • If you still need additional funds to pay for your undergraduate education, your parents can take out a Parent Loan for Undergraduate Students, or PLUS Loan. This federal program allows your parents to take a loan covering the difference between your scholarships, grants, and already-existing loans. These loans are the responsibility of your parents, and they must start paying them back 60 days after the funds are disbursed to your school. PLUS Loans have a reasonable interest rate, and there is no limit on how much your parents can borrow through the PLUS program.

Private Loans

Private loans are not made through any federal agency. Instead, your parents would go directly to the banking institution of their choice, and apply for an educational loan to cover the cost of your education. Unlike federal loans, private loans are not backed by the government, may have much higher interest rates, are not subsidized in any way, and may require that your parents begin paying back the loan amount immediately. Private loans vary considerably from bank to bank—your parents will need to do considerable research to ensure that they are making the best financial decision for them, and for you.

What are the requirements for each type of loan?

  1. For the Stafford and Perkins Loan programs, the student must file a Free Application for Federal Student Aid (FAFSA), which can be found at www.fafsa.ed.gov. Although not required, the FAFSA is recommended for parents of students who wish to apply for PLUS Loans.
  2. For Subsidized Stafford and Perkins Loans, students must have a demonstrated financial need. This means that your parents’ income cannot be above a certain amount. To see what the limits on income are, see the Federal Student Aid website, http://studentaid.ed.gov.
  3. Parents of students applying for PLUS Loans will have to submit to a credit check. This is the only type of federal loan that has a credit check; Stafford and Perkins programs to do not require a credit check.
  4. Private loans typically require that your parents have a certain income level, and will also require a credit check. The requirements will vary from bank to bank, but will typically be stricter than those for federal loans.

Next week's installment of the College Admissions Tip of the Week will talk about grants and scholarships, and how you can start investigating these options.

Want more? Check out Part 1 of this series.

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