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Student Loans

Learn how students loans can help pay for college expenses.

Unfortunately, student loans are almost always essential to afford the mounting costs of higher education. [©Shutterstock, 2010]
©Shutterstock, 2010
Unfortunately, student loans are almost always essential to afford the mounting costs of higher education.

Student loans are available for college students to help pay for tuition and other college-related expenses, such as housing and books. There are two main types of loans: federal student loans and private loans. Money from federal loans, which goes directly to the school for tuition, makes up a substantial amount of the college loan money in the United States. Many students use a combination of government and private loan money to meet their expenses.

Federal Student Loans

Federal loans for students are guaranteed and insured by the United States government and usually offer a lower fixed interest rate than private loans. There are two types of federal loans available. A subsidized loan is only for college students who can show financial need. These loans are essentially free loans for the student, because the government is responsible for paying the interest that accrues before repayment begins. With an unsubsidized loan, the government does not pay the interest because the loans are not based on the student's financial circumstances. For both subsidized and unsubsidized loans, no payments are required as long as the student is attending school and maintaining satisfactory grades. Barring certain mitigating circumstances, repayment of the loans starts six months after graduation.

Undergraduate students may be able to borrow up to $12,500 per year, depending on what year of school they are in and what type of federal loan they have, according to the U.S. Department of Education and Federal Student Aid. Graduate students can borrow even more, sometimes as much as $20,500. There are several types of loans available, including the Federal Family Education Loan Program, the Federal Direct Loan Program, the Stafford Loan and the Perkins Loan. Students do not need a co-signer for these loans, and interest rates are fixed. Federal Loans usually have better terms than private loans.

PLUS Loans

Parent Loans for Undergraduate Students (PLUS loans) are available for qualifying parents who want to help their children pay for tuition but don't have the money to do so. These loans are not awarded based on financial need; however, parents must pass a credit check before securing the loan. Repayment is similar to student loans -- parents must either begin payments within 60 days after the loan is fully disbursed or within six months after their child drops below half-time student status. In addition, although the government does not pay the interest, it is usually tax-deductible.

FAFSA

Filling out the Free Application for Federal Student Aid (FAFSA) is the first step in applying for federal aid. It's important for students to send in this application, even if they don't think they will qualify for need-based loans. Not only is the FAFSA used for both subsidized and unsubsidized loans, states that have the merit-based Hope scholarship may use it to make disbursement decisions. Many universities and colleges also use this information to give need-based financial aid.

The FASFA is a lengthy document, but families can usually complete it in about an hour. The government will use the information, including the family's total income and assets, to calculate a student's EFC, or Expected Family Contribution. The EFC will determine how much federal aid is possible for the student.

According to FAFSA, the government has a yearly deadline for the application completion, but each state also has a deadline, which may be earlier than the federal one.

Private Loans

Because federal loans rarely pay for the complete cost of college, many students have to look elsewhere for financial help. After maxing out federal loan options, students and parents can also consider private loans from banks or other lending companies. Besides tuition, private student loans can help pay for other college-related expenses, such as books, housing and even a computer. These types of loans have less paperwork and take less time to get approval than federal loans. Private loans usually require a parent or other person as a co-signer, since most students have either a limited or non-existent credit history.

When looking for a private loan, it's important to shop around and compare interest rates. Unlike government loans, these loans have competitive interest rates that may vary depending on a credit score and amount borrowed. Some private loans have prepayment penalties. Private student loans may also have origination fees that can add to the total cost. Although borrowers can often delay repayment on most private college loans until after graduation, interest starts accruing immediately. Once repayment starts, penalties for late monthly payments can be high compared to government loans.

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