Federal Perkins Loans. Formerly known as National Direct Student Loans (NDSL), these loans are made only to the student and carry the very low fixed interest rate of 5%. Repayment begins usually nine months after the student graduates, leaves school, or drops below half time status. No interest is charged during the college years, and students have up to ten years to repay. Although the money comes from the government, these loans are administered through the college aid office.
The Financial Aid Officer at the school gets to decide which students receive these loans and how much they receive, based on your need relative to the need of the other students seeking aid. Undergraduates can borrow up to $4,000 per year, with a cap of $20,000. Students must usually show a high amount of need to be granted these loans.
Federal Stafford Loans. There are two types of Stafford loans. "Subsidized" Stafford Loans are available to students who have shown "need" as determined by their financial aid application. The federal government subsidizes the loan by not charging any interest until six months after the student graduates, leaves school, or falls below half-time enrollment status. (That six-month period is known as the "grace period")
The second type is known as an "unsubsidized" Stafford Loan and is not based on need. Virtually all students who fill out a FAFSA are eligible for these loans. From the moment a student takes out an unsubsidized Stafford loan, however, he or she will be charged interest. Students are given the option of paying the interest while in school or deferring the payment of interest (which will continue to accrue) until repayment of principal begins. Students with little remaining need may find that that part of the loan will be subsidized, while the remainder of the annual borrowing limit will be unsubsidized.
In both cases the federal government guarantees the loan, which ensures a very low interest rate. Beginning July 1, 2007, Stafford Loans have a fixed interest rate of 6.8 %. Beginning July 1, 2007, most dependent undergraduate students are eligible to borrow up to $3,500 for the freshman year, up to $4,500 for the sophomore year, and up to $5,500 per year for each of the remaining undergraduate years with an aggregate borrowing limit of $23,000. Independent undergraduates (as well as dependent undergraduates whose parents have been turned down for a federal parent's PLUS Loan) are eligible to borrow an additional $4,000 for each of the first two years of study and an additional $5,000 per year for the third year of study and beyond; however these additional amounts will be unsubsidized. For such students, the aggregate borrowing limit is $46,000, however only a maximum of $23,000 can be subsidized. Beginning July 1, 2007, graduate and professional school students can borrow up to $20,500 per year; however, only a maximum of $8,500 per year can be a subsidized Stafford. There is a $138,500 aggregate borrowing limit including any undergraduate Stafford Loans, however no more than $65,500 can be subsidized.
Some school do not specify in their award packages if the Stafford Loan will be subsidized. If this is the case, you should call the financial aid office to find out.
One other wrinkle about Stafford loans: since 1994, some schools have administered their Stafford loans through the William D. Ford Federal Direct Loan (Direct Loan) Program in which student's receive their loan funds directly from the federal government through the financial aid office. Other schools continue to participate in the Federal Family Education Loan (FFEL) Program in which students will get their Stafford loan funds by applying through banks and other private lenders that coordinate these loans with the school.
PLUS Loans (Parent Loan for Undergraduate Students). As credit-based loans go, it's hard to beat the PLUS loan. Parents can borrow up to the total cost of attendance at a college minus any financial aid received. This means any parent who can pass the credit test can get this loan. The PLUS loan is not a need-based loan. So if Bill Gates wants to take out a PLUS loan when his daughter goes to college, he will be able to! These loans have a fixed interest rate. If the schools participates in the Direct Loan program the rate is 7.9%. If the school participates in the FFEL program, the rate is 8.5%. (This discrepancy is rates may change when Congress reviews the Higher Education regulations) Repayment begins 60 days after you receive the loan and may extend up to 10 years. Some lenders will permit a co-borrower. While there is no aggregate borrowing limit, the school can refuse to certify a loan or certify an amount that is less than what the parent would otherwise be eligible to receive.
Alternative Loans. Many lenders have developed alternatives to the federal programs listed above to help families cope with the expense of an education. These alternative loans often mimic some of the best features of the federal programs; however most of these loans involve variable interest rates instead of the fixed rates currently charged for federal education loans originating after July 1, 2006.
Another approach is to use a home equity loan. Because home equity loans have the advantages of low interest rates and usually mean an interest deduction on your taxes, many families find that these loans are an excellent financial strategy for meeting education costs. Moreover, the funds need not be spent only on direct college costs, but also can be used for big-ticket items such as computers or travel.
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