For most college students, federal student loans are necessary to cover the costs of attending college. Taking out student loans is a decision that takes a lot of planning, thought, and responsibility. Before taking out any student loans, you should decide if they are really necessary to cover educational expenses.
According to Lechter and Totman, “Federal student loans are loans offered through government funding that are characterized by low interest rates and flexible repayment plans” (pg. 134). The two main types of student loans are subsidized loans and unsubsidized loans. Subsidized loans are more need-based, and the government will pay accrued interest for you while you are in school at least half time, during your grace period, or during any period of deferment. Unsubsidized loans, on the other hand, are available to any student, and the accrued interest will be paid by the student (pg. 134). In addition to these two types of loans, Perkins Loans and Direct PLUS Loans are also options.
While subsidized and unsubsidized Direct Loans are the most common, you should be aware of some less common types of loans that you might be eligible for. A Perkins Loan is available for a graduate or undergraduate student who demonstrates exceptional need. Perkins Loans are “considered the best loan available” because of beneficial features such as a low interest rate (paid by the government while student is in school), payback that begins nine months after graduation instead of six, and no origination or default fees (pg. 135). Direct PLUS Loans are provided for “graduate or professional students and parents of students still considered dependents that are enrolled in undergraduate programs” (pg. 136). These loans have more restrictions, and thus are not as attractive.
How do you determine which loan is right for you? First you should do an assessment of your EFC (expected family contribution) to see if you would qualify for need-based loans such as subsidized Direct Loans and Perkins Loans. You should never take out Federal student loans to cover anything other than educational expenses. Remember, a loan is a legally binding agreement. If you take it out, you must pay it back. There are many rights and responsibilities for a loan borrower, so make sure you understand all of them before you apply for a student loan.
Lechter, Sharon and Angela Totman. Your Financial Mastery: Financial Literacy for the Real World. TechPress, Inc, 2013. Pgs. 134-137. Print.
About the Author
Ryan Laspina is Compliance and Default Prevention Specialist at American Public University System. He is a current MBA student at Shepherd University in Shepherdstown, WV. Ryan studied business and English as an undergraduate. His specialties include writing, editing, and financial planning and management.