Nearly half of all American students take out loans to make attending college affordable, according to the U.S. Department of Education. A combination of federal and private aid often covers the part of tuition that scholarships and grants cannot. Understanding all student loan options is critical to getting the best deal for your education.
Federal Student Loans
The U.S. government offers low-interest loans to students entering a university at the undergraduate, master’s, doctoral or professional level. The most popular loan programs include Perkins, Stafford, PLUS and Health Professions. To apply for one of these federal plans, learners must complete the Free Application for Federal Student Aid, FAFSA.
In 2012, an average of $6,800 in Stafford Loans went to undergrads and $17,000 went to grad students. Any student with financial need can take out a Direct Stafford Loan. These loans come at a 3.86 percent interest rate for undergraduates and a 5.41 percent rate for grad students. The school determines the maximum that can be borrowed based on tuition costs, fees, textbooks, room and board and other expenses.
Stafford Loans may be subsidized or unsubsidized. Students attending college at least half time should accept subsidized loans first because the government pays the interest. In contrast, the interest on unsubsidized money starts growing as soon as the deposit is made.
Students with the highest level of financial need may qualify for Perkins Loans in addition to Stafford Loans. Currently, interest rates are set at 5.0 percent. Both full-time and part-time attendees are eligible. Since Perkins Loans fall under campus-based financial aid, not every school offers the program.
Direct PLUS Loans let parents borrow on behalf of their undergraduate children and give graduate students an extra source of education funds. Unlike other government loans for students, PLUS Loans require a credit check. Applicants cannot show signs of bankruptcy, foreclosure, repossession or other adverse credit events. The current annual interest rate is 6.41 percent. Because Direct PLUS Loans are more expensive and require credit checks, borrowers should look into Stafford Loans first.
Health Professions Student Loans
Full-time students studying in the health professions can accept extra loan money through the Health Professions Student Loans and Nursing Student Loans programs. Students must attend an approved college or university and study pharmacy, optometry, dentistry, podiatry, veterinary medicine or nursing. At 5.0 percent fixed interest, these loans present a better deal than graduate Stafford Loans.
State and Institutional Loans
In addition to the federal government, state departments of education and individual colleges provide good sources of financial assistance. Public and private universities offer a mix of need-based and merit-based loans at various interest rates. These institutional loans are awarded on a case-by-case basis to undergrads, grad students, nursing students and medical students. In some cases, students must max out their federal loan money before tapping into institutional funds.
Private student loans, also called alternative education loans, come from banks and specialty companies instead of from a government or school. Both students and parents can take out these unsecured loans. Interest rates may be fixed or variable. Because the interest on many private loans ranges from 5.75 to 12.37 or more, these loans are best for students who have maxed out other forms of financial aid or do not wish to borrow from the federal government. Because private education loans vary by lender, applicants should read the fine print about fees, repayment plans and deferment options before accepting an offer.