02.11.10 | Demystifying Federal Student Loans
If you’re like me, you probably were at least somewhat confused the first time you looked at your financial award letter. “Stafford Loans”, “Perkins Loans”, “PLUS Loans”, what does it all mean?! Well friend, I’m glad you asked!
Each type of loan has a special purpose, so I’d like to break it all down for you and we’ll start with with the most common one, the Stafford loan.
To get started with these puppies, there are two different kinds of Stafford loans: subsidized and unsubsidized. The difference between the two is all about the interest; subsidized loans have a lower fixed interest rate of 4.5% for the 2010-11 academic year (meaning you pay less money over the course of the loan) and actually don’t start accruing interest until your six month grace period after graduation is over.
Unsubsidized Stafford loans begin to build interest (currently at 6.8% fixed) immediately after disbursement, which means that they snowball like private student loans. The nice thing about Stafford loans though is if you can afford to, you have the option of paying off the interest as it accrues while you’re still in school without any penalties. The end result is you pay a lot less interest over the life of the loan, and save yourself a pile of money. If you can’t afford to pay the interest while you’re in school though, don’t worry too much… you’re still getting a bargain on the interest rate compared to most private student loans out in the market.
A Perkins loan is a special type of low-interest product (5% fixed, as of 2010) intended for students with exceptional financial need. Although your need for the loan is determined based on your FAFSA, your school actually is the entity that decides whether to give you the money or not. Every year, the Federal Government grants participating schools with a certain amount of funding meant for Perkins loans, and each school can choose to lend only those funds, or add some of their own to the pool for financial assistance to their students.
If you ever write an appeal notice to your financial aid department at school, this, along with any school-sponsored scholarships or grants, is likely what they would consider you for to increase your award. One thing to consider that is a little odd for this particular type of loan is that since the school is your lender, you actually will receive the repayment bill from them instead of the government. Due to this, there can be different billing cycles… for instance, it isn’t unheard of to only be billed for this type of loan once every four months instead of monthly.
The PLUS loan is the last type of lending that the government offers to students and families, and is meant to bridge the gap between your Stafford, Perkins awards, and your total cost of attendance. Unlike the other two, the PLUS loan requires a credit check, much like a private student loan. There is a quirk though, in that if the parent does not pass the credit check, a friend or relative can actually co-sign on the loan. The APR of this loan changes every July, but will never exceed 9.0%.
As a side note, all the loans above are available to both undergraduate AND graduate students. As always, the best types of financial aid you can get are scholarships and grants (since you don’t have to pay them back!), and there are tons of resources available to find them like StudentScholarshipSearch and ScholarshipPoints. However, the subsidized Stafford loan is definitely the best option you can get as far as student loans go, and will cost the least over the course of your repayment.
*Credit Images to “Cmiper” on Flickr
ScholarshipPoints Code: MYSTERYGONE
The Student Loan Help blog is sponsored in part by:
@ Cherl – At the moment, the interest rate and grace period are superior to the unsubsidized Stafford loan, yes. However, the Perkins loan has to be awarded to you by your school, so there is no guarantee you will be able to get one.
May 5th, 2010 | #
I heard the perkins loan is better than the unsubsidized stafford loan is that true?
May 5th, 2010 | #
this was very helpful, not i know what loan to choose
April 29th, 2010 | #
Wow. I never knew! This gave me sooo much info. Thanks!
April 26th, 2010 | #
very helpful, thank you
April 25th, 2010 | #
awesomely helpful thanks!
April 20th, 2010 | #
Its interesting, I am in college and taking loans as well but I never knew the difference.
Once again and again Thank you
April 17th, 2010 | #
I will have all of this in mind
April 12th, 2010 | #
I never knew the difference between the various loans that appear on my award letter as the author of this article pointed out, but now I'm informed thanks to schlorship points.
April 11th, 2010 | #
Thanks for the great information, which is really helpfull.
April 9th, 2010 | #
Thank you, very helpful to know.
April 10th, 2010 | #
this is like heaven for lost seniors going to college
April 9th, 2010 | #
This is very helpful information. Thank you for the clarification of sutdent loans and the differences of each loan.
April 7th, 2010 | #
Very helpful i had no i dea about these loans thank you!
April 7th, 2010 | #
helpful!!!
April 5th, 2010 | #
very helpful. thank you
April 5th, 2010 | #
thank you so much. It was really helpful!
April 2nd, 2010 | #
Helpful thanks.
April 1st, 2010 | #
Thank you for the information and distinctions between the different types of loans out there. I did not know some of the loans even existed. It did clarify certain questions I possessed bfore the reading took place.
April 1st, 2010 | #
Can a student loan damage my credit score? And if I get a student loan for all 5 years im in college how much money would I have to pay back per month once I graduate?
March 25th, 2010 | #
Very helpful!
March 22nd, 2010 | #
Thank you so much for listing and explaining all of my financial aid options as far as loans.
March 20th, 2010 | #
thanks, very imformative
March 14th, 2010 | #
Thank you…very helpful!
March 12th, 2010 | #
Really thanks!
March 9th, 2010 | #
This information was what I was looking for. With this info I feel very confident, but would prefer other options to taking a loan. Thanks.
March 9th, 2010 | #
This blog definitely demystifies the differences between federal student loans. Thank you for offering this information to current and future borrowers.
March 5th, 2010 | #
reading this makes me feel overwhelmed when i think about my loans but i need them and thankgoodness i can get them!
March 3rd, 2010 | #
im not sure about loans just yet
March 3rd, 2010 | #
Thanks! This information was very helpful. I will definately use it.
March 3rd, 2010 | #
thanks!!!
March 2nd, 2010 | #
Very Informative
March 1st, 2010 | #
easy to understand
March 1st, 2010 | #
wow..thats intresting
February 28th, 2010 | #
This was really helpful.
February 27th, 2010 | #
my first time choosing which loans i was going to apply for was so hard. this is a huge help though and will make things so much easier.
February 26th, 2010 | #
this cleared some questions that i had about these loans.
February 26th, 2010 | #
Helpful and easy to understand.
February 23rd, 2010 | #
thanks for info and points
February 23rd, 2010 | #
I'm glad you found it useful. Feel free to pass it on if you think a friend could use it… there are social media buttons on the top right for you
February 22nd, 2010 | #
I remeber the first time I saw my FAFSA report, gah it was not pretty! This article is very helpful, nice job.
February 17th, 2010 | #
helpful!
February 17th, 2010 | #
Im scared i wont be able to pay them back
February 16th, 2010 | #
I dont prefer loans. Sometimes i get scaed that i wont be able to pay them back
February 16th, 2010 | #
I don’t mind loans, but i wouldn’t prefer it. I rather pay of my school working or recive grants by doing some volunteering/acivites.
February 15th, 2010 | #
i don’t really like lowns. I would like to recive grants or work my way through it since paying back along interest seems to just take out more from your pocket. I wouldn’t mind loans, but I wouldn’t prefer it.
February 15th, 2010 | #
I will try all other methods first before applying for a loan.
February 15th, 2010 | #
Cash is King.
February 14th, 2010 | #
Great informative information for someone just starting college or looking into college funding – such as a high school student.
February 14th, 2010 | #
I just started and I’m not sure what loans I shoud get?
February 14th, 2010 | #
Thanks for the information, it was really helpful.
February 14th, 2010 | #
Helpful article
February 13th, 2010 | #
Thanks so much!!! i understand much better now
February 13th, 2010 | #
Subsidized Stafford. I’ll have to remember that. Do they loan out for grad school too? What about PhDs?
February 13th, 2010 | #
it for your future
February 13th, 2010 | #
take out loans if you didnt recieve any free money
February 13th, 2010 | #
have to pay them back
February 13th, 2010 | #
one day you will have to pay them back
February 13th, 2010 | #
This information was helpful.
February 13th, 2010 | #
thanks for info
February 12th, 2010 | #
Loan can really help when you have no money.
February 12th, 2010 | #
thank!
February 12th, 2010 | #
If you don’t need to take out a loan, then don’t.
February 12th, 2010 | #
Nice article.
February 12th, 2010 | #
great article, very informatve.
February 12th, 2010 | #
@ Jadeha – Loans are tools to help you get what you want (in the case of this website, education), but you have to understand their implications. If you can justify the cost of borrowing money for your education… the federal ones are the best kind to get.
February 12th, 2010 | #
are loans bad?
February 12th, 2010 | #
it is really helpful but at the same time you could get debt and find a way out.
February 12th, 2010 | #
@ Jayla – Scholarships are always the best route… but if you HAVE to take out loans to pay for your education, always try for federal ones before you go to private student loans.
February 12th, 2010 | #
But taking out too many loans is still a bad thing, right?
February 12th, 2010 | #
i like your article, its really helpful
February 12th, 2010 | #