Types of Student Loans
Student loans are funded by a variety of sources including The United States Federal Government and private lenders like banks and credit unions. Federal loans are the most accessible to students, and offer the best repayment terms.
Private loans, also referred to as personal loans and alternative loans can be difficult for students to secure without cosigners. Interest rates are higher than federal student loans, but still fall below most other types of private financing (home, car, etc.)
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Federal Student Loans
The Federal Family Education Loan program (FFEL) is a now-defunct lending program designed to provide American college students and their families with federally backed student loans. These loans are now made through the U.S. Department of Education’s Direct Loan Program.
These distinct types of loans are available to students and parents seeking Federal Financial Aid:
Stafford Loans
Subsidized Stafford Loans are available to students who demonstrate financial need. Payments are not required while you are enrolled in school, or during grace periods and deferment periods. Interest rates vary, but are currently 3.4%. Loan limits move on a sliding scale, based on what year you upare in college; ranging from $5,500 annually, for first year students to $7,500, for third year students and beyond.
Unsubsidized Stafford Loans do not require students to show a particular level of financial need. Interest accrues on these loans from the moment the funds are issued, and students are given the choice to pay as they go, or add accumulated interest to the thiotal amount owed following school. Loan limits match those of Subsidized Stafford Loans, but interest rates are higher; currently fixed at 6.8%.
To be considered for Stafford Loans and other Federal Student Aid, you must submit a Free Application for Federal Student Aid (FAFSA). Repayment begins six-months after graduation, and is governed by repayment schedules ranging in length from 10
Perkins Loans
Perkins loans are federally funded loans administered directly by your institution of higher education college loans(IHE). The loans are extended to students who have the greatest financial need. In general, families with annual incomes below $25,000 are eligible for Perkins Loans.
These three factors determine the size of your Perkins Loan:
When you apply
Your level of financial need
Funding level at your school
The maximum annual loan for undergraduate students is $5500, with a lifetime loan maximum of $27,000. Graduate students can borrow up to $8000 each year, with a $60,000 lifetime cap.
Perkins Loan repayment starts 9 months following graduation, with a fixed 5% interest rate.
Direct PLUS Loans
Parents of dependent undergraduate students can borrow money under this federal program. Borrowers must be able to pass a credit check, and the student whose education is being funded must be a dependent that meets these minimum requirements:
Under 24 years of age
Single
No dependents
Parents access PLUS loans by filing an application, and signing a Master Promissory Note (MPN). Interest rates are fixed at 7.9%, and borrowing limits are determined by subtracting all other financial aid award amounts from the total cost of attending school.
Consolidation Loans
For students holding multiple federal loans, this program facilitates combining them into a single loan. A single monthly payment replaces the need to pay each loan individually, and the repayment terms of the loan can be extended for up to 30 years.
Students considering this loan should pay close attention to how their total repayment costs might be affected. Consolidating and extending the repayment schedule of your loans can add considerable costs to your total obligation
- State Student Loans
State-specific funding varies – some have none, while others have a great deal. Your FAFSA places you in contention for some state loans, but other programs require separate enrollment. Your high-school guidance counselor and college financial aid office are equipped to sort out the specifics for your state.
You can also find valuable information on state higher education websites. In Minnesota, for example, students are eligible for loans, under a program called SELF.
SELF is not subsidized, so worthy credit is required for getting a loan. Minnesota residents who attend participating colleges are eligible to borrow up to $10,000 each year, at a fixed rate of 7.25%. Cosigners provide credit reinforcement that enables students with limited credit to apply.
- Private Student Loans
Private student loans, such as those offered by Wells Fargo and Chase are designed to bridge the gap between your financial aid package and the true cost of your education. Private loans require borrowers to pass credit checks, and the loans often have higher interest rates than those subsidized by the U.S. Government.
Cosigners who are willing to share responsibility for your loan provide the credit resources you need to get private financing. Federal Student Loans should be considered first, but used appropriately; private loans can effectively pay for extra educational costs, without creating unmanageable financial burdens.
Private student loans are sometimes called personal loans and alternative student loans.
- Institutional Student Loans
Institutional loans are extended by colleges and universities as a means to cover educational costs that remain after other forms of financial aid have been applied. Long-term and short-term institutional loans are used to pay for books, room and board, and other student expenses.
Institutional loans are by definition campus-specific, so interest rates and repayment terms are determined by each educator. Your financial aid office is best equipped to outline specific programs offered by your school.