Most families borrow money to help defray the cost of education. In fact, the greatest portion of federal student aid comes in the form of loans. Loans may not be as attractive as grants or scholarships, but don't dismiss them outright. A government–sponsored loan is one of the best deals in town.

Perkins Loans

Perkins Loans are offered to undergraduate and graduate students with exceptional financial need. Perkins loans are subsidized, meaning the government pays the 5% interest while you attend school. (In other words, you borrow $1,000. After a year, the loan's value is $1,050. The government pays the $50 interest; you still owe $1,000.)

Repayment begins nine months after you graduate, leave school, or drop below half-time status.

William D. Ford Federal Direct Loans

William D. Ford Federal Direct Loans are the most common type of aid conferred to undergraduate and graduate students. They come in four varieties:

Direct Subsidized Loans

Direct Subsidized Loans are for undergraduate students with financial need. The government pays the interest while you are in school and for the first six months after you leave school. These loans have fixed interest rates, and repayment begins six months after you graduate, leave school or drop below half-time status.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are for undergraduate and graduate students, and there is no requirement to show financial need. You are responsible for paying the interest at all times. Interest rates are fixed for the life of the loan, and repayment begins six months after you graduate, leave school or drop below half-time status.

Direct PLUS Loans

Direct PLUS Loans are for graduate students and parents of dependent undergraduates only. Interest rates are fixed but higher than the rates of Perkins, Direct Subsidized, and Direct Unsubsidized Loans. For parents repayment begins after the loan has been fully paid out, but for graduate students the loan will be placed into deferment until six months after you leave school or drop below half-time status.

Parents and graduate student may borrow up to the cost of attendance minus all other aid. Unlike the Perkins, Direct Subsidized, or Direct Unsubsidized loans, eligibility relies on a good credit history. If a parent cannot secure a PLUS loan, the student may qualify for additional unsubsidized loans.

Direct Consolidation Loans

Direct Consolidation Loans allow you to combine most federal student loans into one bill with one monthly payment. The loan has a fixed interest rate and gives you thirty years to back it back, which can lower monthly payments. Make sure to consider the impacts of losing any original loan benefits or of increasing the length of your repayment period before you go this permanent route. Once loans are combined, they cannot be separated again.