Student Loans 101
An education loan, or college loan, is a form of financial aid that must be repaid, with interest. (Scholarships on the other hand, do not have to be repaid.) College loans generally cover school expenses, including tuition and fees, room and board, books and school supplies, as well as any transportation. Loans can also help pay for technology needs (i.e., a computer) and for necessary dependent care.
There are three major types of education loans: student loans (e.g., Stafford Loans and Graduate PLUS Loans), parent loans (e.g., PLUS Loans ) and Private Student Loans (also called alternative student loans). A fourth type of education loan, the consolidation loan (both Federal Student Loan Consolidation and Private Student Loan Consolidation), allows the borrower to lump all of their loans into one loan for simplified payment. A recent innovation is peer-to-peer student loan lending (students can borrow money from multiple individuals looking for an investment opportunity). Federal student loans are available in either the Direct Loan program [or Federal Direct Student Loan Program (FDSLP)] or the federally guaranteed student loan program [also called Federal Family Education Loan Program (FFELP)].
Federal law sets the maximum interest rates and fees that lenders may charge for federal student loans. Federal law also determines the maximum student loan borrowing limits and the types of repayment plans that can be offered.
Very few students can afford to pay for college without some form of education financing. Two-thirds (65%) of 4-year undergraduate students graduated with a Bachelor’s degree and some debt in 2007-08, and the average student loan debt among graduating seniors was $23,186 (excluding PLUS Loans but including Stafford, Perkins, state, college and private loans). Among graduating 4-year undergraduate students who applied for federal student aid, 86% borrowed to pay for their education and the average cumulative debt was $24,651. Average cumulative debt increased by 5.6% or $1,139 a year since 2003-04. If you were to include PLUS Loans in the total, 66% of 4-year undergraduate students graduated with some debt in 2007-08, and the average cumulative debt incurred was $27,803.
These figures were calculated using the data analysis system for the 2007-2008 National Postsecondary Student Aid Study (NPSAS) conducted by the National Center of Education Statistics at the U.S. Department of Education. The 2007-2008 NPSAS surveyed 114,000 undergraduate students and 14,000 graduate and professional students.
Grants, scholarships, work-study and other forms of gift aid just do not cover the full cost of a college education. Many students find that they must supplement their savings with government student loans and private student loans. The federal student loan programs offer lower interest rates and more flexible repayment plans than most consumer loans, making them an attractive way to finance your education. You can also deduct up to $2,500 in student loan interest even if you don’t itemize deductions on your income tax return.
Many student loan providers offer low cost federal and private student loans with consistently high quality servicing and flexible repayment terms. College Spot is partnered with student loan lenders that are offering federal and private student loans. College Spot also offers scholarship resources, advice for defaulted student loan borrowers, and numerous calculators that can help you better understand your borrower options.
Federal Student Loan Interest Rates
The interest rate on the Stafford Loan for new loans first disbursed on or after July 1, 2006 is a fixed rate of 6.8%. The same rate applies to the in-school, grace and repayment periods. A lower interest rate is available on subsidized Stafford Loans (interest is paid by the Federal Government while the borrower is in an in-school or grace period) for undergraduate students for loans first disbursed on or after July 1, 2008 through June 30, 2012. The rate in 2009-10 is 5.6%, then 4.5% in 2010-11, then 3.4% in 2011-12, and returning to 6.8% for new loans in 2012-13 onward. The interest rate on new Parent PLUS Loans and Graduate PLUS Loans first disbursed after July 1, 2006 is a fixed rate of 8.5% in the FFEL program and 7.9% in the Direct Loan program.
The interest rates on existing variable rate Stafford and PLUS Loans will continue to change annually on July 1st, based on the last 91-day T-bill auction in May. The current interest rates on the Stafford loan are 5.6% during the in-school and grace periods and 6.8% during the repayment period. The current interest rate on the PLUS loan is 8.5%.
Federal Student Loan Borrowing Limits
Federal Stafford Loans:
The amount you can borrow is based on the cost of attendance less other financial aid received, your year in school, and your status as a student. Independent students may borrower more because they are paying for college by themselves. Students may not always qualify for the maximum amount – check with your financial aid office.
|Year In School||Dependent Students||Independent Students|
|First Year||$5,500 ($3,500 sub/$2,000 unsub)||$9,500 ($3,500 sub/$6,000 unsub)|
|Second Year||$6,500 ($4,500 sub/$2,000 unsub)||$10,500 ($4,500 sub/$6,000 unsub)|
|Third Year & Up||$7,500 ($5,500 sub/$2,000 unsub)||$12,500($5,500 sub/$7,000 unsub)|
|Graduate Student||N/A||$20,500($8,500 sub/$12,000 unsub)|
|Undergraduate Dependent||$31,000(Up to $23,000 may be subsidized)|
|Graduate or Professional||$138,500 (Up to $65,000 may be subsidized) or $224,000 (for Health Professionals)|
Federal Parent PLUS and Graduate PLUS Loans:
- The yearly limit on a Parent PLUS or Graduate PLUS Loan is equal to the cost of attendance minus any other financial aid that is received. For example, if the cost of attendance is $60,000 and you receive $40,000 in other financial aid, then you could borrow up to but no more than $20,000.
Stafford Loans are federal loans made to college and university students (both undergraduate students and graduate students) to supplement personal and family resources, scholarships, grants, and work-study.
Stafford Loans are guaranteed by the Department of Education either directly or through guarantee agencies. Nearly all students are eligible to receive a Federal Stafford Loan regardless of credit score or other financial issues. Stafford Loans offer a grace period of six months, which means that no payments are due until six months after graduation or three months after the borrower drops to less than half-time at school without graduating.
There are two types of Stafford Loans and Graduate Stafford Loans:
- Subsidized Stafford Loans
- Awarded based on financial need
- Borrower is not charged interest before repayment begins or during periods of deferment – The federal government “subsidizes” the interest during these times
- Unsubsidized Stafford Loans
- Not awarded based on financial needs
- Any eligible student can take out unsubsidized Stafford Loans
- Borrower will be charged interest from the time the loan is disbursed to the time the loan is repaid in full
For more information on Federal Stafford Loans, click here and for more information on Federal Graduate Stafford Loans, [click here].
The Federal Parent PLUS Loan is available to parents of students enrolled at least part-time in a program included within a formal list of participating post-secondary institutions. PLUS Loans differ from other federal student loans like the Stafford and Perkins Loans in that it can cover a larger amount of the cost of education, has a higher interest rate, the borrower goes into repayment immediately after the final disbursement, and the commitment is undertaken by the parent, rather than the student. The primary benefit of the PLUS Loan is that parents can borrow federally-guaranteed low interest loans to help pay for their child’s education.
For more information on Federal Parent PLUS Loans, click here.
The Federal Graduate PLUS Loan, like the Parent PLUS Loan, is an unsubsidized and federally guaranteed loan, up to the cost of education. This loan is taken out in the graduate student’s name on his or her own signature and credit rating. Federal loan deferment and forbearance options are the same as the Stafford Loan so graduate and professional students can postpone repayment while enrolled at least half-time in a degree or certificate program.
For more information on Federal Graduate PLUS Loans, click here.
After graduation, many students have a series of loans (and payments), through the Stafford, PLUS, or Perkins loan programs. When you consolidate federal student loans into one single loan you realize a reduced monthly payment (up to 53% less), a longer repayment term, and a fixed interest rate. Also, any deferment or forbearance time that you have used will be renewed. Some lenders also offer programs that will allow you to consolidate your private student loans.
Private student loans are loans issued and guaranteed by non-federal organizations. These include state or local student loans, private bank student loans, and private agency loans. Interest rates on private student loans are set by the issuing lender and can vary greatly. Private student loans are credit-based and do not require filing the FAFSA. The loan funds can be used to help cover living expenses, computers, lab equipment, textbooks, and any other expenses associated with getting a college education.
Get more information on Private Student Loans.
Bad credit? Don’t think you can qualify for a student loan? Get more information on student loans for bad credit