Types of Loans

Types of Loans

Doing away with federally guaranteed private loans whittled the three basic types of loans undergraduate students should know about down to two: federal loans made by the government directly, and private or alternative loans from banks or other private lenders that carry no federal government guarantee. (Sometimes a college itself may make loans, too, usually in partnership with a financial institution.)
Every student should first look to federal loans because the interest on these loans is capped at a fixed rate set by Congress. Every financial aid administrator at every college in the country should tell students this. And students should be wary of any lender that tries to steer them away from federal student loans.
Federal loans remain the gold standard for borrowers. Unlike private loans, they allow more latitude when it comes to repayment, something that is relevant to these economically troubled times. Repayment based on income can offer relief; it can be calculated using the percentage of discretionary income, not the amount owed.
The most popular federal loans are the Stafford loans, available to students regardless of financial need.
There are two types of Stafford loans available to students. For those who demonstrate sufficient financial need, the government will pay the interest on "subsidized" Stafford loans for students while they are enrolled in college. Otherwise, loans accumulate interest while a student is in school, and the student may either pay that interest as it comes due or let it be added to the principal balance.
Perkins loans are available to students who have the greatest financial need; priority is given to students receiving federal Pell grants, which are awarded to low-income students. Parents of students can also take out federal loans, known as Parent PLUS loans (Parental Loans for Undergraduate Students).
Families taking out PLUS loans can borrow enough to cover their full "cost of attendance" less any other financial aid, like scholarships or grants, that they receive. The cost of attendance is defined by law and is made up of more than just tuition and fees, and includes room and board, an allowance for books and supplies, transportation and other personal expenses. Every college should provide incoming students with its cost of attendance.
The federal Education Department has information on Stafford, Perkins and PLUS loans on its Web site, which can be hard to navigate.
The simplest way to borrow may be directly from the federal government, through the William D. Ford Federal Direct Loan Program. But this option exists only for students attending a college that participates in the direct loan program. For students attending institutions that do not participate, shopping around is a good idea.