Students and families are often confused with the variety of options available when it comes to financing a college education. There are a myriad of options, from scholarships and grants to Federal and private student loans.

As part of the Higher Education Act of 1965, President Lyndon Johnson created this law which was intended “to strengthen the education resources of our college and universities and to provide financial assistance for students in postsecondary and higher education.” This increased all sources of Federal funding provided to universities and added in grants and other forms of financial aid.

The Federal Stafford Loan is available to both undergraduate and graduate students enrolled at least half time at a college or university accepting Federal aid. This is a need-based program in which undergraduates may borrow up to $5,500 per year in subsidized funds based on academic level and graduate level students may borrow up to $18,500 per year (up to $8,500 in subsidized funds and the remainder in unsubsidized funds). The funds are sent directly to the school and are applied to the student’s account. To ease the financial burden, payments are not required until six months after the student graduates. When looking to apply for a Stafford Loan, students should see what types of borrower benefits each lender is offering. As these loans are all fixed at the same interest rate set by the U.S. Government, lenders are offering incentives to borrow by way of discounts, such as waived fees, rate reductions for early payment and cash back.

While a Federal Stafford Loan is certainly a necessary start, there often is more unmet need. A Parent PLUS Loan is a common way that parents contribute to their child’s education. This credit-based loan allows parents to borrow the total cost of undergraduate education including tuition, room and board, supplies, college fees and more, minus any other aid received. Once the loan has been put into the student’s account at the school, repayment begins shortly thereafter, at which time this loan can be consolidated. At a fixed interest rate, the Parent PLUS loan is an easy and cost effective solution to help bridge the gap between Stafford loan funding and the cost of education.

The Perkins Loan is another Federal loan available to both undergraduate and graduate students offered on the basis of financial need, other aid received and availability of funds at each school. The Federal Government lends schools funds for distribution to its neediest students. The school, therefore, is the lender, and undergraduates may be awarded up to $4,000/year and graduates may be awarded up to $6,000/year. These loans need to be repaid directly to the school and have been fixed at a 5% interest rate since the program was started. Students can take advantage of a nine-month grace period and a ten-year repayment term. However, if consolidated with any existing Federal loan, including Stafford or Graduate PLUS loans, this can extend the repayment term.  Consolidation has been mentioned a few times and it’s really in the best interest of students to take advantage of this upon graduation. Each Federal loan, on its own, has a 10 year repayment term, regardless of total loan debt. Consolidation fixed the interest rate and extends the repayment term, allowing more time to repay an often hefty Federal loan debt.

Private student loans have gained popularity over the recent years as Federal funding hasn’t quite met the entire need of the cost of education. There are many other costs in education, besides just tuition. Commuting students need to cover transportation costs somehow. City campuses don’t always guarantee housing forcing students to find an off campus apartment, often with high rent costs. There are costly textbooks to purchase, lab supplies and flights home that aren’t always covered by traditional financial aid. Private loans are originated to students by a bank or other financial institution, unlike Federal loans. Private student loans also offer similar benefits to students as a Federal loan, such as deferred payment until graduation, different repayment terms, and borrower benefits. The interest rates on private loans vary from company to company and are, usually, on a basis of credit. Co-signers are a great way for a student who may have limited or no credit at all to get this loan.  Because of the varying private loans available, most parents and families “shop around” until they find the ideal solution. 

About the Author:
Christopher S. Penn is the producer and creator of the Financial Aid Podcast, a daily free Internet radio show about making college affordable, as well as Chief Technology Officer of the Student Loan Network. His work has been featured in several books, newspapers, and conferences.