Student loans 101

2006-01-19

A student loan is a way of paining for your education. You can lend money when you are young, and pay them back when you have finished your education. In a way, a student loan is a way of redistributing money over your life time. You borrow and use the money when you are young, and pay them back when you are older and hopefully have developed a better financial situation by working. Contrary to a scholarship, a student loan has to be repaid and usually also come with an interest. A student loan typically falls into one of these three categories: Student loans, Parent loans and Private education or alternative loans.

A traditional student loan is where the federal government provides the student with an education loan. Most federal loans are so called “Stafford loans”, but a student with exceptional need can be eligible for a “Perkins loan”. A Stafford loan is a federal education loan. The student must be enrolled in an eligible program at least half time to receive a Stafford loan, so you have to check whether or not the specific education program that you are planning to attend makes you eligible for a Stafford loan. All accredited schools are automatically eligible. You also have to meet some other general requirements.

A Subsidized Stafford loan is a student loan where you are not charged any interest until you start paying off the loan. If you are later allowed to postpone your payments due to an eligible reason, you will not be charged any interest for that period either. The federal government will subsidize the interest during such periods. Whether you are eligible for a Subsidized Stafford student loan depends on you financial need. If you are not eligible for a Subsidized Stafford student loan, you may still be eligible for an Unsubsidized Stafford student loan, since these loans are not awarded on the basis of need. With an Unsubsidized Stafford student loan, you will be charged interest from day one. If you are unable to pay the interest during your time as a student, the interest will be added to the loan. This means that every time you are incapable of paying the interest, your loan will become a little bigger. Since the interest is based on the size of your loan, you will eventual not only pay interest on the initial amount of money that you borrowed. Instead, you will pay interest on all the non-payments as well. A Federal Perkins student loan is attainable for both undergraduate and graduate students with financial need. It is a low interest loan (5 percent) and it is your school that lends you the money. The loan is funded with a combination of government funds and money contributed by your school. You repay the loan to your school, not to any federal or governmental agency.

Parent loans are often so called “PLUS” loans - Parental Loans for Undergraduate Students. There are two types of PLUS loans: Direct PLUS loans and FFEL (Federal) PLUS loans. Some schools participate in the Direct Loan Program, while other schools participate in the FFEL Loan Program. Contact your school for more information regarding this. With a Direct PLUS loan, the U.S. Department of Education will be the lender of the money and your school will assist in administering and disbursing the money. With a FFEL PLUS loan, your parents will have to find a participating lender. The easiest way of finding a suitable lender is to contact the Guaranty agency found in your state. The Federal Student Aid Information Center (FSAIC) can provide you with name, address and telephone number of the agency serving your state if you call 1-800-4-FED-AID (1-800-433-3243).

Private and Alternative loans are loans from a private entity, most commonly a bank. Private and Alternative loans are often used as a supplement to federal loans, since federal loans do not always cover the total cost of the education. The rules and requirements for at private loan will vary greatly from one lender to the other, and the best way of finding out which lender is most suitable for you is to contact several lenders.

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