Loans

Loans

For many students, borrowing money — also known as taking out a loan — is a way to make their college dreams come true. But unlike other types of financial aid, loans have to be repaid with interest — the fee you’re charged for borrowing the money. Learn the facts about loans and you can borrow wisely.

Important Definitions

Defer: Some federal loans let you defer — or put off — paying the loan back until after you graduate.

Interest rate: Interest is a fee you pay for borrowing money. Interest is charged regularly — usually once a month. This fee is equal to a percentage of the amount you borrowed. This percentage is called the interest rate. The higher your interest rate, the more you’ll owe over time.

Need-based: The federal government offers need-based loans to students who cannot afford the cost of college. Eligibility for these loans is determined by the information you submit on the Free Application for Federal Student Aid (FAFSA).

Subsidized: The federal government offers some subsidized loans. That means the government pays the interest on the loan while you’re in college.

For more definitions related to loans and other financial aid, see the glossary.

Types of Loans

The federal government, colleges and private organizations all provide college loans to students and parents. Generally, federally subsidized loans (Perkins & Subsidized Stafford) are the best because they have the lowest interest rates and you don’t have to pay interest while you’re in college. The next best loans are non-need based unsubsidized Stafford and parent PLUS loans. Finally, banks and private lenders offer loans for college, but they often have the highest interest rates and are not subsidized.

Need-Based Loans

  • Federal Perkins Loans are awarded by colleges to students with the highest financial need.
  • Federal subsidized Stafford Loans have a borrowing limit that increases for each year of school you complete.

 

Non-Need-Based Loans

  • Federal unsubsidized Stafford Loans allow you to add the interest fees to the amount you borrowed until after graduation. But this means you’ll actually end up owing more.
  • Federal parent PLUS Loans allow parents to borrow the total cost of college, minus any financial aid received.

 

Private Loans

In general, private loans are not subsidized or need-based. They also often require a parent to commit to repay the money if the student fails to. The interest rates of private loans vary. Banks and other financial institutions usually have the highest interest rates while some private organizations and foundations offer lower interest rates.

Loan Breakdown

See the table below for a breakdown of each type of loan and its current interest rate.

Loan Need-Based? Subsidized? Sponsor Borrower Interest Rate
Subsidized Stafford Yes Yes Federal government Student 3.4% (fixed)
Unsubsidized Stafford No No Federal government Student 6.8% (fixed)
Perkins Yes Yes Federal government Student 5% (fixed)
Parent PLUS No No Federal government Parent 7.9% (fixed)
Private No No Banks, colleges, foundations, state agencies Usually student with creditworthy parental cosigner Usually higher than federal rates; variable

 

Why Need-Based Loans Are Best

The federal government offers need-based loans like the Perkins Loan and subsidized Stafford Loan to students with the most financial need. These loans are often the best choices for the following reasons:

  • The government supports your education by subsidizing the loan.
  • These loans often provide the lowest interest rates.
  • They allow you to defer repaying any money until you’re out of school and, hopefully, earning an income.
  • They don’t require a credit check.
  • If you qualify for need-based loans, choose them first.