How to get a federal loan for college
By Larry Buhl, special to CareerBuilder
If you’ve recently suffered sticker shock at college tuitions, you’re not alone. More students are relying on financial aid to pay for the growing costs of their education, whether they’re taking a few online courses or starting an undergraduate or graduate program at a prestigious university. Often, student financial aid packages include some kind of loan.
The biggest lender is the federal government. Your school’s financial aid department can help you apply for these loans, but it helps to have a good idea of what you’re looking for and whether you should approach the office.
Below are four types of federal college loans.
1. Stafford Loans
Stafford Loans are for students pursuing undergraduate, graduate or professional degrees. There are two types of Stafford Loans: subsidized and unsubsidized. To receive a loan subsidized by the U.S. Department of Education, which pays the interest accrued on the loan during certain periods, you need to show financial need. Unsubsidized Stafford Loans don’t have this requirement. You can receive a subsidized loan and an unsubsidized loan for the same period. Unsubsidized loans have been eliminated for graduate and professional students as of July 1, 2012 but remain available for undergrads.
With a subsidized loan, the government pays all the interest while you’re in school. With an unsubsidized loan, you pay the interest, although you can defer payments until after graduation and capitalize the interest (this adds the interest payments to the loan balance and increases the total size and cost of the loan). Repayments begin six months after you graduate or drop below half-time enrollment.
You can get a Stafford Loan through one of two programs:
• Direct Loan Program, which allows students to take out subsidized or unsubsidized loans directly from the DoE. The loans are paid directly to the DoE.
• Federal Family Education Loan, which provides funds through private lenders and guarantees them through the U.S. Government. You have to repay these loans to the bank or private lender that issued them.
2. Perkins Loans
Perkins Loans are low-interest loans for full-time undergraduate and graduate students with exceptional financial need. The amount you receive depends on your financial need and the funding level of the school. Right now, the program limits are $5,500 per year for undergraduate students and $8,000 per year for graduate students, with cumulative limits of $27,500 for undergraduate loans and $60,000 for undergraduate and graduate loans combined. Perkins Loans carry a 5 percent fixed interest rate for the 10 year life of the loan.
Your school will either pay you directly, usually in the form of a check, or apply your loan to your school tuition. You must repay this loan to your school, and because the loan is subsidized by the government, interest doesn’t start accruing until you start paying it back. You won’t need to make any payments until nine months after you graduate, drop to part-time status or leave school.
3. PLUS Loans
PLUS Loans are for parents with dependent undergraduate students enrolled at least half time at an eligible school. PLUS Loans are available through the FFEL program and the William D. Ford Federal Loan (Direct Loan) program. Parents can receive either loan, but not both. Graduate and professional degree students can apply directly, instead of their parents, for federal PLUS Loans.
Parents can borrow the cost of the student’s attendance minus any other financial aid received. Right now, there are fixed interest rates of 7.9 percent for a Direct PLUS Loan and 8.5 percent for a FFEL PLUS Loan. The money is paid through the school.
For Stafford, Perkins and Plus Loans, you must submit a Free Application for Federal Student Aid.
4. Direct Consolidation Loans
Direct Consolidation Loans allow you to consolidate Stafford Loans, PLUS Loans and Perkins Loans. Consolidation can reduce your monthly repayments and lengthen the term for the loan (up to 30 years, and you can choose the length). Unlike the other loans, consolidation loans have a fixed interest rate. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans.
You can start the process online at http://www.loanconsolidation.ed.gov/. Be aware that applying for a Consolidation Loan is a multistep process that could take several weeks to complete.
Other student loan options
The federal government is not the only source for school loans. If you need to borrow even more money than you can get from any of these federal programs, you can approach private lenders for private or alternative loans.