Trying to decide which loan options to use to finance your undergraduate education can be a little tricky. Although your school's financial aid office can offer you a list of loan options available specifically to students at your school, here is a list of frequently asked questions outlining the pros and cons of several popular options.
The eligibility requirements listed are general in nature, and your financial aid office should provide you with a specific list of loans you qualify for based on your Free Application for Federal Student Aid (FAFSA).
As an undergraduate, what loans are available to me?
As long as you are enrolled in an accredited institution at least half-time, you should be qualified (with limited exceptions) to borrow unsubsidized Stafford loans and alternative/private loans. Your parents may also qualify to borrow PLUS loans to help pay for your education. If you have financial need as determined by your FAFSA, then you may qualify to borrow a Perkins loan or a subsidized Stafford loan.
What is a Perkins Loan?
A Perkins loan is a low interest loan (5%) offered to students demonstrating extraordinary need. The loan is guaranteed by the Federal government and is distributed from your school. If you qualify for a Perkins loan, you may only borrow up to $4,000 per semester for a total not to exceed $20,000. You do not have to make payments while in school. After you are no longer enrolled at least half-time, Perkins loans offer a 9 month grace period, flexible repayment options, and forbearances or deferments for students with temporary financial hardships. You are responsible for repaying the balance on the loans.
What is a Stafford Loan?
Stafford loans are guaranteed by the federal government. Subsidized Stafford loans are awarded based on financial need, and the government pays your interest while you are in school or while the loans are deferred. Unsubsidized loans are offered to most students, but you pay whatever interest accrues during the time you attend school. Like most student loans, you do not have to make payments while you are in school, although you may voluntarily pay the interest as it accrues on your loan.
Loan limits are set by the government depending on your level of education and dependent status. You may never borrow more than a total of $57,500 for an undergraduate degree. Like Perkins loans, after you are no longer enrolled at least half-time, Stafford loans offer a grace period of six months, flexible repayment options, and forbearance or deferment for students with temporary financial hardships. After graduation or non-enrollment, you are responsible for repaying the total amount borrowed.
Can my parents borrow money for me to attend school?
Yes, your parents can borrow money for you to attend school through a Parent PLUS loan. A PLUS loan is available to parents of undergraduate students who are enrolled at least half-time. A borrowing parent must be a U.S. citizen and not have an adverse credit history. Unlike Perkins or Stafford loans, the parent is responsible for repayment. Additionally, unlike most student loans, repayment begins within 60 days of disbursement. PLUS loans are ideal for students who cannot cover the cost of education with a Perkins or Stafford loan, and whose parents are willing to cover the additional costs. Your parent may borrow up to the cost of attendance minus other financial aid, and no annual or aggregate limit is set.
If I can't cover my costs with a Stafford loan or a PLUS loan, what are my options?
Alternative or Private loans may also be available. Alternative loans are serviced through a commercial lender and are not backed by the federal government. The lender will conduct a credit check, and sometimes may require proof of income. A traditional college student will often not qualify on his own but will need a co-signer. However a credit-worthy student may be able to borrow up to the cost of attendance minus any other financial aid. Often the interest rate and origination fees are higher than for government-backed loans. The repayment options and grace period may also differ. The advantage to an alternative loan is that the co-signer does not have to be a parent. Anyone willing to co-sign who meets the lender's requirements will work. Alternative loans are especially beneficial for you if you cannot pay the cost of education with only Stafford or Perkins loans, but your parents cannot utilize the PLUS loan program.
How will I know what loans I qualify for?
After you fill out your FAFSA, your school will determine the cost of attendance or your student budget. No matter how many loans you may get approval for, you can never borrow more than the student budget set by the school. Once your school has determined your budget, the school should notify you of your financial aid options, including whether you qualify to borrow Perkins or Stafford loans. After receiving your financial award package, if you need a PLUS loan or private loan, you will need to request the paperwork from your school or through the lender of your choice.
If I'm offered a variety of loans, which ones should I accept first?
If in doubt about which loan to choose, go with government-backed loans. Often these loans offer lower interest rates, and the repayment terms are more flexible than private loans. If you qualify, always choose the Perkins loan or the subsidized Stafford loans first. While in school, you are borrowing money for free because the government pays the interest. If these options are not available to you or you still have financial need left, choose a PLUS loan if your parent will take on the responsibility. One of the advantages of having a government-based loan like the Stafford, Perkins, or PLUS loan is that after graduation, the loans can be consolidated into one monthly payment. The alternative loans cannot. If you happen to qualify for a loan forgiveness program after graduation, federally backed loans are normally more likely to be forgiven as well. Choose alternative or private loans as your last option.
Do I have to borrow all the money the school offers me?
Absolutely not. If the school offers you $10,000 in Stafford loans, but you only need $8,000, then let the financial aid office know. They can change the amount to anything below what you have been approved to borrow.
Borrow as little money as possible because, regardless of when or if you graduate, you will have to pay the money back. The school's budget should not be your budget if you can live on less. Remember, student loans are hard to pay back, and it is better to live like a college student now than after you graduate.
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