Yesterday we took a look at the need for student loans in order to pursue a college education and came to the conclusion that college education makes a big difference in future earnings and therefore is worth the costs.
Today, we’ll focus on the different types of student loans available to undergraduate students.
There are two main types of student loans: Federal student loans and private student loans. There are several types of federal loans, so let’s explore the options:
Federal Student Loans
Federal student loans have more favorable terms than private loans. The government sets a low, fixed interest rate, nearly all student are eligible to receive federal student loan money, and they feature a grace period after school during which no payments are due.
Stafford Loans: These loans are available to almost anyone who submitted a FAFSA, has a financial need as determined by the school, is enrolled at least half time.
There are two types of Stafford loans:
Subsidized Stafford Loans are need-based, and interest does not accrue on the loans while students are in school or during a six-moth grace period after leaving school.
Unsubsidized Stafford Loans are not need-based and students are responsible for all the interest that accrues on the loan, including they are in school.
Independents are eligible for an additional $4,000 in unsubsidized loans during the first two years of school and an addition $5,000 in unsubsidized loans during the last two years.
The fixed interest rates on subsidized Stafford loans first disbursed between July 1, 2009 and June 30, 2010 is 5.6%. For the following 3 years, interest rates will be 4.5%, 3.4%, and 6.8%, respectively.
All unsubsidized Stafford loans have a fixed interest rate of 6.8%.
Federal Perkins Loans
These types of loans are for students with the greatest financial need. It has a low fixed interest rate of just 5% and they share many of the characteristics of subsidized Stafford loans. In addition, they also include the advantages of not having fees and having a longer grace period.
Federal Parent PLUS loans
These loans are for parents of undergraduate, dependent students and can be used to fund the entire cost of a child’s education. The interest rates are a fixed 8.5%, so the other types of loans would be preferable, if available.
In addition to the federal loans, private loans may be available to cover the rest of the education costs for students. Discover student loans are a great example of an option that offers low and affordable interest rates. Those who will be taking responsibility for their loans without the help of their parents are the most likely candidates for private loans.
There are many companies that offer private student loans, with the major ones being Sallie Mae and Citi. Interest rates vary based on many factors, and lower rates go to those:
- who have a higher credit score
- who have a co-signer
- who sign up for automatic debit payments
My private student loans current has a variable interest rate of 3.25, which is very low. Over the next few years, that rate is likely to rise, but for now, I am very happy with it.
Now that we’ve covered the different types of student loans, tomorrow we’ll take a look at the different repayment options and which option is best for certain situations. Sign up for the RSS feed or get email updates and make sure you don’t miss it!