Doing away with federally guaranteed private loans whittled the
three basic types of loans undergraduate students should know about down
to two: federal loans made by the government directly, and private or
alternative loans from banks or other private lenders that carry no
federal government
guarantee. (Sometimes a college itself may make loans, too,
usually in partnership with a financial institution.)
Every student should first look to federal loans because the
interest on these loans
is capped at a fixed rate set by Congress. Every financial aid
administrator at every college in the country should tell students this.
And students
should be wary of any lender that tries to steer them away from
federal student loans.
Federal loans remain the gold standard for borrowers. Unlike private
loans, they allow more latitude when it comes to repayment, something
that is relevant to these economically troubled times. Repayment based
on income can offer relief; it can be calculated using the percentage of
discretionary income, not the amount owed.
The most popular federal loans are the Stafford loans, available to students regardless of financial need.
There are two types of Stafford loans available to students. For
those who demonstrate sufficient financial need, the government will pay
the interest on "subsidized" Stafford loans for students while they are
enrolled in college. Otherwise, loans accumulate interest while a
student is in school, and the student may either pay that interest as it
comes due or let it be added to the principal balance.
Perkins loans are available to students who have the greatest
financial need; priority is given to students receiving federal Pell
grants,
which are awarded to low-income students. Parents of students
can also take out federal loans, known as Parent PLUS loans (Parental
Loans for Undergraduate Students).
Families taking out PLUS loans can borrow enough to cover
their full "cost of attendance" less any other financial aid, like
scholarships or grants,
that they receive. The cost of attendance is defined by law and
is made up of more than just tuition and fees, and includes room and
board, an
allowance for books and supplies, transportation and other
personal expenses. Every college should provide incoming students with
its cost of
attendance.
The federal Education Department has information on Stafford, Perkins and PLUS loans on its Web site, which can be hard to navigate.
The simplest way to borrow may be directly from the
federal government, through the William D. Ford Federal Direct Loan
Program. But this option exists
only for students attending a college that participates in the
direct loan program. For students attending institutions that do not
participate,
shopping around is a good idea.
