An education loan is money lent to the student (or parent) in order to pay for college. This money must be repaid (unlike Scholarships) with interest. There are four primary groups of loans:
Student Loans
Since there remains an increasing amount of students who rely on the federal government’s loan programs to finance their college educations, these loans are directed toward students and their needs. Since these are loans that the students themselves have to repay, they typically have low interest rates and do not require credit checks or any sort of collateral. Student loans also provide a varying range of deferment plans, as well as extended repayment terms, making it easier for students to select payment methods that are best fit for their personal finances.
Stafford Loan - The Stafford Loan is the main federal student loan. These loans are either subsidized (the government pays the interest while the student attends school) or unsubsidized (the loan borrower pays the interest, although these payments can be deferred to post graduation). Financial need must be demonstrated in order to receive Stafford Loans. Stafford loans come in two categories:
- Federal Family Education Loan Program (FFELP) - These loans, previously provided solely by private lenders, are now being distributed through the Direct Loan Program by the federal government, and are “federally guaranteed.”
- Federal Direct Student Loan Program (FDSLP) - These “Direct Loans” are distributed by “Direct Lending Schools,” and are provided directly by the US government.
Keep in mind that all students are eligible for the unsubsidized Stafford Loan regardless of need. With this loan, capitalizing the interest can defer the payments until after graduation. This collects all the interest payments and adds them to the total loan cost, leaving a lump sum to be paid once you have finished school.
To apply for a Stafford Loan, you must submit the FAFSA, even if you only desire the federally guaranteed unsubsidized loans. Remember that you can be eligible to receive both subsidized and unsubsidized loans.
Parent Loans
Students dependent on their parents should not stress about taking all the loan expenses onto their shoulders. Parents can also take out loans to supplement the financial aid that is given to their children. Parents are financially responsible for these loans. This should be kept in mind if parents want their children to pay any portion of the parent loans because if the student fails to make payments on time, the parents will be held accountable.
Parent Loan for Undergraduate Students (PLUS) - This loan allows parents to borrow up to the total cost of attendance if necessary to cover any costs that are not already being covered by the student’s financial aid program. There is no cumulative limit on this loan, and the federal government funds it. All interest on the PLUS loan cannot be subsidized while the student is in school, and repayment begins 60 days after the aid is received. Eligibility for the PLUS loan is largely dependent on a credit check determining whether or not the parent has a solid credit history. If a parent is denied a PLUS loan, be for adverse credit history or some other reason, the student is then eligible for an increase in loan limits on unsubsidized Stafford Loans.
Private Loans
Private loans are offered by private lenders, and relieve you of a mountain of federal forms to complete. These loans can help bridge the gap between the total cost of your education, and the amount you are eligible to borrow from the government. Private loans can be beneficial if the money received from the federal government is not sufficient or if you are looking for more flexible repayment methods.
However, since private loans are largely dependent on your credit score, they can be hard to obtain. They also tend to be more expensive than federal education loans, along with having varying interest rates. It is recommended that students or parents looking for financial aid go through all the federally supported options first before resorting to private loans. If you do choose to apply for private loans, try using a cosigner to increase your chances of qualifying, since the higher of the two credit scores will be considered.
Consolidation Loans
Consolidation loans can be a choice option for you if you are finding yourself struggling with multiple payments for a variety of loans. These loans combine several student and/or parent loans into one lump sum amount, which is then used to pay off the balances on the other loans. Consolidation loans are available for most federal loan types, and some private lenders offer private consolidation loans for any private education loans you may have. The interest on consolidation loans is calculated by the weighted average of all the interest rates on the loans that are being consolidated, then rounded up slightly, so the overall interest rate will only increase a small amount.
There is no additional cost to consolidate your loans. Remember to avoid any situation where a lender asks you to pay a fee to consolidate because consolidation is to be done at no cost to you.
While only loans from the same borrower can be consolidated, both students and parents can consolidate education loans. Loans can also be consolidated with any lender. Keep in mind that consolidation can only occur during the designated grace period or after the loans are in repayment.
Since Student and Parent loans are "Federally-Guaranteed," they typically offer lower interest rates and cannot exceed a specified maximum rate. Due to the different interest rates that these loans carry, students should borrow their loans borrow their financial need starting with the lowest interest rate loans first. We call this the Loan Borrowing Order.
