5. Financial Aid Overview

a. Types of financial aid – Self-help aid (continued)

Student loans
Loans are another type of self-help financial aid and must be paid back. This is money that you borrow to pay for your college expenses. Student loans can be a good way to finance college. Remember that your education is an investment that can have great financial returns, among many other benefits. Some families are not comfortable borrowing student loans but then end up using credit cards to make ends meet. Credit cards can have much higher interest rates than student loans and are generally an expensive way to finance your education or living expenses. Another benefit of student loans is that your school may be able to refund any left over student loan money which you can use for living expenses. But remember, you must pay your student loans back, so only borrow what you really need!

There are two categories of loans available: federal and private. Your first choice should be federal—these loans usually have lower, fixed interest rates and are backed by the government.

Private or alternative loans should be considered only after you’ve used all of the gift and federal loan allowance you are eligible to receive. Be sure to complete the FAFSA and exhaust other options before considering private loans because private loans often have less desirable terms than federal loans. These may be an option if you need extra funding beyond the federal loan limits.  If you have established good credit and do not wish to complete the FAFSA, you may want to investigate a private loan. Remember, not all private loans are the same. Be sure to read the fine print and ask the tough questions.  Most private loans have variable interest rates, which means they change multiple times throughout the year – they could go up or down.

Federal Stafford Loans
The Federal Stafford loan is an education loan designed to help you pay for college. Stafford loans are made through one of two U.S. Department of Education programs: the William D. Ford Federal Direct Student Loan Program (Direct Loans) and the Federal Family Education Loan Program (FFELP). Direct and FFELP loans can be either subsidized or unsubsidized. The government sets the interest rate and limits the amount students can borrow each year. To be eligible for a Stafford loan, independent students or dependent students and their parents must submit a FAFSA. Families or students can complete the FAFSA as early as January 1st of the year the student will attend college. Payment on Stafford loans begins six months after graduating or dropping to less than half-time enrollment.

Subsidized vs. Unsubsidized
Stafford loans are offered as either subsidized or unsubsidized loans. A subsidized loan is based on financial need. If you have a subsidized loan, you won’t be charged interest while you’re in school or during authorized periods of deferment. The federal government subsidizes or pays the interest during these periods.

An unsubsidized loan is not based on need. You’ll be charged interest from the time the loan is disbursed until it’s paid in full. If you allow the interest to accrue, meaning you don’t pay the interest, while you’re in school (or during other periods of nonpayment), it will be capitalized.  Capitalized means that the interest will be added to the principal amount of your loan, and additional interest will be based on that higher amount. In other words, you will be charged interest on the interest.  You can receive both types of Stafford loans in the same enrollment period.

Federal PLUS loans
Federal PLUS loans are for parents of dependent undergraduate students enrolled at least half time and for graduate students. Like Stafford loans, they’re made through either the Direct Loan or the FFEL program. PLUS loans are unsubsidized and the federal government has set the interest rate at 8.5 percent for the FFEL program. To get a PLUS loan, you must qualify for credit. Parents or graduate students may borrow up to the cost of attendance, minus any other financial aid received.

Federal Perkins loans
These low-interest (five percent) loans for high-need students are awarded at participating schools based on financial need. Your school is your lender and you repay your school. Depending on when you apply, your need and the funding level of your school, you can borrow up to $5,500 each year as an undergraduate and $8,000 as a graduate or professional student. Repayment begins nine months after graduation or nine months after your enrollment drops to less than half time.

Alternative or Private loans
These credit-based loans can help cover the difference between other financial aid and the cost of education. Interest rates are variable and set by lenders. Generally, you are limited to borrowing up to the cost of attendance minus any other financial aid, and most lenders offer several repayment options.

Most private loans have variable interest rates, which means the interest rates can change multiple times throughout the year. Be sure to complete the FAFSA and take out any Stafford loans you may be eligible for before considering private loans.