What is as Education Loan?
Education loans, unlike other forms of financial aid, are borrowed money that must be repaid, with interest. These are real loans – just like car loans or mortgages. You can’t have these loans cancelled just because you don’t like the education you’ve received or because you’re having financial difficulty. Education loans are a serious obligation, so think carefully about the amount you want to borrow and ultimately repay later with interest.
Types of Education Loans
There are four types of education loans: student loans (e.g., Stafford and Perkins loans), parent loans (e.g., PLUS loans), alternative student loans (also called private student loans), and a new fourth category called “consolidation loans”, which are loans that lump together other outstanding loans into a single new loan for simplified repayment.
- Student Loans: You apply for student loans the same way you do for other federal student aid – by completing the Free Application for Federal Student Aid (FAFSA). See the article entitled Applying for Financial Aid for more details. You don’t need a separate loan application. But, you will need to sign a promissory note, which is a binding legal document that states that you agree to repay your loan according to the terms of the note. There are two types of federal student loans: Perkins Loans and Stafford Loans.
Federal Perkins Loans are provided by the federal government and offered through participating schools. It is important to note that each school participating in the Federal Perkins Loan program only receives a certain amount of Perkins Loan funds each year. When all funds are used for that award year, no more awards can be made for that year, so make sure to get your applications in early.
Stafford Loans, unlike Perkins Loans, do not draw from a fixed pool of funds held by the school, so money doesn't run out. Stafford Loans come in two forms: Direct and FFEL. With Direct Stafford Loans, the lender is the U.S. Department of Education. With FFEL Stafford Loans, the lender may is a bank, credit union, or other participating private lender. Stafford Loans can also be “subsidized” or “unsubsidized”. For a subsidized loan, which is provided on the basis of financial need, the U.S. Department of Education pays the interest while you’re in school at least half time and for the first six months after you leave school. With unsubsidized Stafford loans, financial need does not need to be demonstrated, but you are liable for interest that accrues while you’re in school. Be sure to recognize the difference in the various types of Stafford Loans.
- Parent Loans: These types of loans are available to parents of dependent undergraduate students who are enrolled at least half time. The Parent Loan for Undergraduate Students (PLUS) is a federal program that lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance. Like the Stafford Loan, PLUS loans are either FFEL (provided by private lenders, such as banks) or Direct (funds provided by the government). You can get applications for Direct PLUS loans from the financial aid office of participating schools. With FFEL PLUS loans, you’ll have to find a lender directly. Most commercial banks offer these types of loans, as do underwriters Sallie Mae and Nellie Mae. Your financial aid office may also be able to assist you in finding a FFEL PLUS lender.
Finally, unlike student loans, parent loans do not defer repayment until after you leave school. This means that your parents must begin repaying both principal and interest while you’re in school. Generally, repayment begins within 60 days of the loan being issued and paid out.
- Alternative Student Loans: Students who have exhausted all of their scholarship and grant options, and who do not qualify for federal education loans, can obtain alternative student loans to help finance their college education. Many lenders have developed alternatives to the aforementioned federal programs. They often have many of the same basic terms and schedules, but are usually offered at slightly higher interest rates – there’s no federal loan program to regulate and cap the interest rates charged with these types of loans.
- Consolidation Loans: Consolidation loans allow you (or your parents, if they have a PLUS Parent Loan) to combine several types of federal student loans into one loan with one monthly payment. Consolidation loans can be entered into any time after you’ve left school. If you take out any student loans, you’ll likely be bombarded with offers from commercial lenders to consolidate your loans. Make sure that their interest rates and repayment periods are no worse than what you have on average with your existing loans. In today’s market of relatively low interest rates, for example, consolidation loans make a lot of sense for people who are repaying older student loans at higher interest rates. But as interest rates continue to rise, you may be better off repaying individual loans if they were issued at lower interest rates.
Which Type of Loan is Best for Me?
Some loans are definitely better than others. The interest rates on federal education loans, for example, are usually lower than other types of education loans. Federal educational loans (except the PLUS parent loan) also defer repayment until after you’ve left school, and even after you’ve left school, they still give you a grace period of six to nine months before you have to begin repayment. There’s also the difference between “subsidized” and “unsubsidized” loans; subsidized loans are preferable because interest does not accrue on the amount borrowed while you’re in school (but they are offered only on the basis of financial need.)
You should begin by first filling out the Free Application for Federal Student Aid (FAFSA). This will determine your eligibility for federal loan programs. After that, if you still have trouble coping with the expense of education, you might consider a parent loan and/or alternative student loan.