Federal Student Loans Explained: Loans for College Come in Many Forms

Student loans are only part of the available funds for attending college. Scholarships may be sponsored by the school or by private agencies or individuals. Grants also may be school or private. The best known, such as the Pell Grant or the Federal Supplemental Educational Opportunity Grant (FSEOG), are government sponsored.

Like these programs, loans can be offered by the government or financial institutions. The government offers several student loan programs. They are the Federal Family Education Loan (FFEL), William D. Ford Federal Direct (Direct) Loan and Perkins/Nursing Student Loan Programs, in which funds are loaned directly to the student, and PLUS loans where the parent of the student is the borrower.

Stafford Loans

Both the FFEL and the Direct loans are “Stafford Loans”. The difference is where the money actually comes from. The FFEL is through a bank or credit union and guaranteed by the federal government. The Direct is lended directly from the government.

Stafford loans can be subsidized or unsubsidized. Each carries its own interest rate (currently 6.8% for unsubsidized and 5.6% for subsidized.) Both have their payments deferred which allows the student to hold off paying them back until he or she is finished with school more than half-time.

The difference is the interest payments. For subsidized Stafford Loans, the government makes the interest payments while the loan is deferred. For unsubsidized loans, the student makes those payments.

Subsidized Stafford Student Loan interest rates will be reduced to 4.5% and in next year to 3.4% for loans disbursed after July 1 of each year, not those loans already disbursed prior to those dates.

Both the subsidized and unsubsidized Stafford loans have maximum amounts that a student may borrow, depending on his or her year in school, with independent students eligible for more funds. Graduate students are also allowed Stafford loans and have higher limits than undergraduates.

Perkins Loans and Nursing Student Loans

These two are grouped together because they are almost identical in their criteria and applications, except for the obvious qualification of being a nursing student for the latter. No specific field of study is required for the former. Perkins and Nursing loans are made not by banks or by the federal government, but by the school itself. They are offered to those students, undergrad, grad and professional, showing greatest need. Those receiving Pell grants get top priority.

Similar to Stafford loans, Perkins loan recipients must be registered for at least six credits. Unlike the Staffords, there is no loan fee with either Perkins or Nursing Student Loans. They both allow ten years to repay after deferment.

These loans are repaid directly to the school. Repayment may be deferred until nine months after graduation or dropping under six credits.

PLUS (Parent) Loans

As the name implies, PLUS loans are made to the parents of undergraduate students. This is the only one of these federal student loans that actually requires an acceptable credit rating. Parents of college students may apply either through the school (Direct or FFEL), a lending institution or state guaranty agency (FFEL only).

Lending limits are lower than for loans made directly to students. Interest rates are variable, so they may be higher or lower than loans made to students, depending on the federal interest rate.

Repayment terms for these loans will vary depending on the plan chosen by the borrower. Prior to graduation, the borrower (student or parent) will receive “exit counseling” during which the repayment terms will be discussed and chosen.

With all the different options, the good news is that application to all these loans may be made with one application, online or by mail. The FAFSA covers application for all federal forms of student financial aid, including loans (student and parent), grants and work study.

The key to remember with FAFSA (or any other application) is to gather all pertinent information and apply early. Loans, grants and work study opportunities offered by colleges and private sources are likely to run out before covering all those who want it.