5 Types of Federal Loans

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talking about student loans

By Sarah Blais – Feb. 6, 2015: 

It’s not fun taking on another debt. But if you find that you absolutely must find a method of financing your education so you don’t need to pay it all up front, a loan is necessary.

There are two types of loans: federal and private. Federal loans are your best bet for a multitude of reasons: they are tax deductible, easier to qualify for, come with a fixed interest rate, don’t require a credit check or cosigner, don’t need to be paid back until you graduate… the list goes on.

Federal loans come in four different programs, all with benefits and drawbacks.

1. Stafford Subsidized

A Stafford loan is offered by both the federal government and third-party lenders, and they’re the most common type of loan. The subsidized loan is the best option because you won’t be charged any interest until six months after you graduate. In order to qualify for it, you must have a certain financial need determined by your FAFSA application and enroll as an undergraduate student (as of July 1, 2012, graduate students no longer qualify). The interest rate right now is 4.66 percent, and you can use a maximum of $23,000.

2. Stafford Unsubsidized

This is the other loan Stafford offers, which accrues interest from the time it’s disbursed until your loan is completely paid off, although you won’t have to pay it until six months after graduation. Keep in mind the interest will still grow while you’re in school, so it would be wise to budget for it in advance. The interest rate is also 4.66 percent, and you can earn $12,500 to $31,000 for schooling based on your dependency status. Again, a FAFSA will determine if you qualify for this type of loan.

3. Perkins

The Department of Education controls Perkins loans. They give the money to colleges to distribute to their students. When it comes time to pay, you will make payments directly to your school. Unlike Stafford loans, Perkins loans are available for both undergraduates and graduate students. However, your institution decides the rate of interest. Three factors on your FAFSA determine if you qualify for a Perkins Loan: when you apply, your college’s criteria for determining financial need, and how much funds your school has.

4. Grad and Undergrad PLUS Loans

If you’re dependent on your parents or guardians, you may qualify for a PLUS Loan, which stands for Parent Loans for Undergraduate Students. Assuming your parents or guardians make a certain amount of money, they can help fund part of your schooling. This type of loan is only beneficial if your parents or guardians are on board with helping you finance a portion of your schooling. Be sure to speak with them first before you submit your FAFSA.

5. Consolidation Loans

This is the best type of loan if you have other debts like a credit card, mortgage, or car payment. With this option, you can pool together everything on one bill for lower payments on all your borrowed money. One positive aspect is you’ll get access to alternative repayment plans that other student loans don’t offer. You can also switch to one fixed rate for everything you’re paying off. On the other hand, this increases the length of your repayment period, meaning you’ll pay more interest in the long run. Take a look at your other loans too, and make sure you aren’t losing borrower benefits offered with your original loans.

Remember that loans and up-front cash aren’t the only way to fund schooling. Search around for scholarships and grants first. Neither one ever has to be paid back, so why pass up the opportunity for free money?

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Sarah Blais is an education writer based in New York City. She has a Bachelor’s in Journalism and Mass Communication in from the Walter Cronkite School of Journalism at Arizona State.

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