Everything parents need to know about their student loan options

College studentsMore than $100 billion in federal education loans and about $10 billion in private student loans are originated every year. For most students, the student loan process begins by applying for federal loans through the FAFSA application. Parents also have the options of paying for their child’s education by obtaining a federal government Parent PLUS Loan or by taking out private loans. Here’s a closer look at some of these college student loan programs.

Direct Loan Program

With the Direct Loan Program, students and parents borrow directly from the federal government instead of through a private lender. The loans are made available via the college’s financial aid office. Like most federal student loan programs, Direct Loans typically offer low fees, low interest rates and lenient payback policies. Federal loans are usually available for students with poor credit.

Stafford Loan

Stafford Loans are also provided by the federal government and are based on students’ financial needs. Most students qualify for some type of financial aid via the Stafford Loan program. To be eligible, students are required to be enrolled at least half-time in college. The loans are available to both undergraduate and graduate students.

Subsidized Stafford Loans: These are also need-based loans. One huge benefit of these loans is that the government pays the interest while the student is attending school and during a six-month grace period upon graduation. No credit check is required for these.

Unsubsidized Stafford Loans: These loans are not based on financial need, and students are responsible for accrued interest as soon as the loan is disbursed. However, they have the option of deferring the payments until after they graduate from college, and there is a six-month grace period after graduation.

Perkins Loan

Perkins Loans are another need-based program operated by the Federal government. They’re low interest, low cost loans that are available through individual colleges and universities. It’s up to the schools to determine which students are most financially deserving of Perkins funds. Money is provided on a first-come, first served basis. Perkins Loans are available to undergraduates and graduate students.

Perkins Loans have no fees and no credit checks. Like subsidized Stafford loans, the government pays the interest on the loans while the student is attending school as well as during a nine-month grace period after graduation. Undergraduate students are limited to $4,000 per year, with a lifetime limit of $20,000. Graduate students are limited to $6,000 per year and $40,000 over the course of their lives.

Parent PLUS Loan

Parents take these loans out specifically to pay for their kid’s college education. Parent PLUS Loans are provided by the federal government at a low interest rate. Students must be dependents and younger than 24. After the full loan is dispersed, the parent is required to begin paying it back within 60 days.

Parent PLUS Loan repayment options

Graduated Repayment Plan: A parent can begin with lower monthly payments that gradually increase over time until the loan is paid in full.

Extended Repayment Plan: Eligible parents are provided payment relief via an expanded repayment term of up to 25 years.

Income Sensitive Repayment Plan: Monthly payment is based on parents’ yearly income and loan amount. Parents are eligible for this plan if their monthly loan payment is greater than 10 percent of their annual gross income.

The Parent PLUS Loan website provides more information.

Parent PLUS Loan versus private atudent loans

If your child has reached the annual maximum for Stafford Loans, a Parent PLUS Loan or private student loans are your options. The Parent PLUS Loan has a fixed interest rate, whereas private student loans typically have a variable interest rate. Currently, interest rates are low and parents may be able to obtain a private loan at a lower interest rate than a Parent PLUS Loan. Many banks also offer special incentives. Private loans may have additional fees, however, so keep this in mind.

Federal student loan consolidation

Students who have taken out multiple federal student loans have the option to consolidate these loans into one payment. A consolidation loan reduces monthly payments and provides a longer term for the loan. The borrower’s loans are paid off, and a new consolidated loan is created. The interest rate may be lower than one or more of the previous loans.

Co-Signing a student loan

Private student loans are awarded based on a person’s credit history. Because many undergraduate students don’t have much of a credit history, they will typically need a cosigner for the loan. If you go this route and your son or daughter defaults on the loan, you’ll have to make the payments.

Career training student loans

Private, credit-based career training student loans are provided to students attending technical or trade schools. They offer some attractive incentives as well as interest rates that reward good credit. Students can use these loans for expenses in addition to tuition, such as room and board. Some of these loans may have extra fees that you should keep in mind.

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