In today’s post-secondary education climate, student loans are becoming a necessity for a large number of students. While scholarships and money from jobs are enough for some, the cost of four or more years of college education continues to rise. Luckily, student loans are available through both government-subsidized programs and from private lenders. Of the two, government loans are much more attractive than private loans. Because they are funded by the government, these loans accrue interest at much lower rates than private (for-profit) loans. It is generally advised that an individual only use government loans to pay for school and that private loans only be taken after all other avenues have been exhausted. Government-backed loans are taken much more often than private loans due to the better terms, and this post will be focusing on the types of government loans.
Subsidized Stafford Loans
Stafford loans are loans that are funded directly by the Federal Direct Student Loan Program, but can vary significantly depending on whether they are subsidized or unsubsidized. Subsidized loans are preferable because they do not begin accruing interest (that you are responsible for) until after you graduate. However, the subsidy is not available to everyone. Generally, it is reserved for those that demonstrate financial need (reported via the required FAFSA form) and not available to those coming from incomes in excess of the $50,000-60,000 range. While your school is ultimately responsible for determining the amount you are awarded, the program caps freshmen at $3,500 for the year, sophomores at $4,500, and each year of undergraduate studies after that at $5,500. The total amount that a borrower can take in Subsidized Stafford Loans is capped at $23,000. Interest rates on Stafford Loans are subject to change, but those loans issued between July 1, 2016 and July 1, 2017 typically carry a rate of 3.76%.
Unsubsidized Stafford Loans
Unsubsidized Stafford Loans are much like their subsidized counterparts, except that the borrower is responsible for paying interest that accrues while they are still in school. However, the payments are usually deferred until the student graduates. Additionally, all students are eligible for the unsubsidized Stafford, regardless of income. The loan availability amount ranges between $5,500 and $20,500 depending on income status, dependent status, student grade classification, and whether or not the student is a graduate student. Graduate students and financially independent students are eligible for larger dollar amounts per year, usually increasing slightly as their grade classification progresses. While these usually loans carry the same stated rate of 3.76% for undergraduate students, the actual amount owed will often be higher than subsidized due to the accrual of interest during the student’s tenure in school.
Stafford Loans – Grace Period
One of the most important features of federal (public) loans is the grace period. For Stafford loans, this period is six months after graduation, dropping out, or after going below half-time enrollment. Institutions may vary widely on what they consider half-time, so it is best to check at your individual institution to see what restrictions may apply. During this six-month grace period, a borrower is not required to make payments on their student loans. This allows students to find a source of income before becoming swamped with debt.
Although the Perkins Loan program will come to its end on October 1, 2017, it is still possible for a student to be awarded a Perkins loan before that date, though unlikely. Perkins Loans offered fixed interest at 5% and, like Subsidized Stafford Loans, deferred interest until leaving school. Another major feature of Perkins loans is the 9 month grace period usually attached to them.
Parent PLUS Loans
PLUS loans are loans to graduate students or to parents helping their children pay for college. The most noteworthy feature of PLUS loans is that there is no hard cap to the amount a borrower can take. Instead the cap is effectively the cost of attendance at the student’s school, if no others factors are present. PLUS loans are less preferable than Stafford loans because they have a higher interest rate. For 2017, the rate is 6.31%.
In summary, public loans are far less predatory and costly than private loans. Along these lines, the more subsidized, the better. Subsidized Stafford loans offer the lowest interest rates and deferred interest, but have income restrictions on eligibility. Unsubsidized Stafford loans have the same low rate, but do not defer interest and have no income restrictions. Perkins loans, though on the brink of extinction, offer the next lowest interest rate and a grace period of nine months (three months longer than Stafford). PLUS loans are only available to assisting parents and graduate students and are effectively capped at the cost of attendance for a given school, however they carry the highest interest rate of public loans.