Student Loans
College means debt. About two-thirds of all four-year undergraduate
students will graduate college with debt, and the average amount of debt is
more than $20,000. But by being smart about how you borrow, you can save
thousands of dollars in interest over the lifetime of your loans. First,
you should prefer federal education loans over private student loans, as the
federal loans have lower fees and interest rates. The major federal loan
programs are:
- Perkins Loan. This is a low-interest loan available to students with exceptional financial need and available from the college. The interest rate is 5% and the government pays the interest while you are in school. Funding for this loan program is limited. Repayment begins 9 months after you graduate. There is a $4,000 annual loan limit for undergraduate students and a cumulative limit of $20,000. It has a 10 year repayment term.
- Stafford Loan. This is a low-interest loan available to all students. There are two versions. The government pays the interest on the Subsidized Stafford Loan while you are in school. The borrower is responsible for paying the interest on the Unsubsidized Stafford Loan while in school, but can capitalize it (add the unpaid interest to the loan balance). Both loans have a maximum interest rate of 6.8% and fees of up to 2.5%. The subsidized Stafford is based on financial need, while the unsubsidized Stafford is not. Any amounts not received as a subsidized Stafford can be borrowed as an unsubsidized Stafford. Repayment begins 6 months after you graduate. College freshmen can borrow $3,500, sophomore students can borrow $4,500, and juniors and seniors (and beyond) can borrow $5,500 per year. There is also an aggregate loan limit of $23,000. Graduate students can borrow more, up to $20,500 per year. It has a 10 year repayment term.
- PLUS Loan. This is a low-interest loan available to graduate and professional students and the parents of undergraduate students. Repayment begins 60 days after disbursement, but one can defer payments and capitalize the interest while the student is in school. The maximum interest rate is 8.5%. There is no cumulative loan limit, and the annual loan limit is the cost of attendance minus any other aid received. This loan does require a modest credit check that three-quarters of prospective borrowers will pass. If the undergraduate student’s parents do not qualify for the PLUS loan, or the student is an independent student, the student will qualify for additional unsubsidized Stafford loan limits ($4,000 per year for freshmen and sophomores, and $5,000 per year for juniors, seniors and beyond). It has a 10 year repayment term.
- Consolidation Loan. After you graduate, you will have four loans, one for each year in school. A consolidation loan, which is like a refinance, lets you combine these loans into a single loan. It also lets you reduce the size of your monthly payment by increasing the length of the loan up to 30 years, based on the amount borrowed. (Increasing the loan term will also substantially increase the interest you pay. Going from a 10 year loan to a 20 year term will cut the monthly payment by about a third, but at a cost of more than doubling the total interest paid.) The interest rate on a consolidation loan is the weighted average of the rates on the loans being consolidated, rounded up to the nearest 1/8th of a point, and capped at 8.25%.
Reprinted with the permission of FinAid. © 2008 by FinAid Page, LLC. All rights reserved.
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