Step 2: What Loans are Available?

Amidst all the excitement of being accepted into college or graduate school, you'll want to take the time to research how you will finance your education. It could mean the difference between crippling debt and manageable debt.


Understanding Federal Loans

* Federal loans are your best bet because they are often subsidized by the government (meaning interest will not accrue while you are in school), can be locked in after graduation at comparatively lower rates and offer much more flexibility in terms of repayment.

* Student Loans:
o Stafford loan: There are two types of Stafford Loans, those financed through a private lender, usually a bank or credit union ("FFELP loans"), and those financed directly through the U.S. government ("Direct loans").

*Stafford loans are granted either subsidized (the government will pay interest while you're in school) or unsubsidized (you will be responsible for interest payments while in school, though you should be able to defer these until graduation). To receive subsidized loans, students must demonstrate financial need. The general breakdown according to FinAid.org is: "About 2/3 of subsidized Stafford loans are awarded to students with family AGI of under $50,000, 1/4 to students with family AGI of $50,000 to $100,000, and a little less than 10% to students with family AGI over $100,000." All students are eligible for unsubsidized Stafford loans. ("AGI" stands for "Adjusted Gross Income" and is your family's annual gross income minus any exemptions allowed by the government when filing your federal income tax return.)

*What you can borrow with a Stafford loan: Stafford Loans allow dependent undergraduates to borrow up to $3,500 their freshman year, $4,500 their sophomore year and $5,500 for each remaining year. Graduate students can borrow $20,500 per year, although only $8,500 of that is subsidized. There are also cumulative limits of $23,000 for an undergraduate education and a $65,500 combined limit for undergraduate and graduate.

*Perkins loan: This loan is one of the most recommended because you lock in a 5% interest rate and schools pay the interest while you're in school. The repayment term is 10 years. Undergraduates can receive up to $4,000 per year and graduate students can get up to $6,000. The cumulative limits are $20,000 for undergraduate loans and $40,000 for undergraduate and graduate loans combined.

*Students receive Perkins loans based on financial need, and the loans will come directly from their schools.

*For teachers, some volunteers, and public service professionals, your Perkins loan may be forgiven over time. See Mahalo's guide, How to Apply for Loan Forgiveness to get a clearer sense of how to qualify.
* Loans for Parents:
LUS loan: The Parent Loan for Undergraduate Students, or PLUS, allows parents to borrow from the federal government to pay for their children's college educations. Graduate students are also now allowed to take out PLUS loans for their continuing education, thus if you are a parent, you should refer to the PLUS as the "Parent PLUS" (as opposed to the Grad PLUS).

*Use FinAid.org's comparison chart to see the differences between Stafford and PLUS loans and what you will owe on both over time.

*PLUS Loans have a fixed interest rate of 8.5%. They are unsubsidized, meaning someone is responsible to make interest payments while the student is in school. PLUS loans also charge fees of 4%, deducted from each disbursement check.


Understanding Private Loans

* Private loans often make up the difference between what your federal loans cover and the total cost of your education.

1. Despite the current controversy swirling around private loans, they are a necessary evil for many students, closing the gap between other forms of financial aid, government loans and the cost of school.
2. Students qualify for private loans mostly based on their credit score.
3. Though more expensive than federal loans, private education loans are generally less expensive than credit card debt.
4. Though it may seem like there are a million private loan offers out there, in truth several banks distribute the majority of private loans. Your school may provide a "preferred lender" list, but this does not mean these lenders are bona fide best choices.
5. Do your research carefully to make sure you get terms that will be reasonable upon graduation, though universities are beginning to revise their preferred lender lists and methodology.
6. Be sure you have truly exhausted all other federal loan offers and scholarships before turning to private loans, whose rates are usually variable and thus susceptible to market conditions, unlike the fixed rate loans you can get from the government.
7. "One in five student borrowers passes up a less expensive federal student loan in favor of a private loan, whether because it is faster to apply, easier to apply (online vs. hefty paperwork), or because students simply aren't made aware of all their loan options. Do not become that one in five!
8. Now that graduate students can take out PLUS loans, they are advised to do so as an alternative to private loans whose interest rates are based on your credit score.