Demystifying Federal Student Loans | 02.11.10

Posted in Financial Aid, Stafford Loan, Student Loans By Student Loan Network Staff

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If you’re like me, you probably were at least somewhat confused the first time you looked at your financial award letter. “Stafford Loans”, “Perkins Loans”, “PLUS Loans”, what does it all mean?! Well friend, I’m glad you asked!

Each type of loan has a special purpose, so I’d like to break it all down for you and we’ll start with with the most common one, the Stafford loan.

Stafford Loans

To get started with these puppies, there are two different kinds of Stafford loans: subsidized and unsubsidized. The difference between the two is all about the interest; subsidized loans have a lower fixed interest rate of 4.5% for the 2010-11 academic year (meaning you pay less money over the course of the loan) and actually don’t start accruing interest until your six month grace period after graduation is over.

Unsubsidized Stafford loans begin to build interest (currently at 6.8% fixed) immediately after disbursement, which means that they snowball like private student loans. The nice thing about Stafford loans though is if you can afford to, you have the option of paying off the interest as it accrues while you’re still in school without any penalties. The end result is you pay a lot less interest over the life of the loan, and save yourself a pile of money. If you can’t afford to pay the interest while you’re in school though, don’t worry too much… you’re still getting a bargain on the interest rate compared to most private student loans out in the market.

Perkins Loans

A Perkins loan is a special type of low-interest product (5% fixed, as of 2010) intended for students with exceptional financial need. Although your need for the loan is determined based on your FAFSA, your school actually is the entity that decides whether to give you the money or not. Every year, the Federal Government grants participating schools with a certain amount of funding meant for Perkins loans, and each school can choose to lend only those funds, or add some of their own to the pool for financial assistance to their students.

If you ever write an appeal notice to your financial aid department at school, this, along with any school-sponsored scholarships or grants, is likely what they would consider you for to increase your award. One thing to consider that is a little odd for this particular type of loan is that since the school is your lender, you actually will receive the repayment bill from them instead of the government. Due to this, there can be different billing cycles… for instance, it isn’t unheard of to only be billed for this type of loan once every four months instead of monthly.

PLUS Loans

The PLUS loan is the last type of lending that the government offers to students and families, and is meant to bridge the gap between your Stafford, Perkins awards, and your total cost of attendance. Unlike the other two, the PLUS loan requires a credit check, much like a private student loan. There is a quirk though, in that if the parent does not pass the credit check, a friend or relative can actually co-sign on the loan. The APR of this loan changes every July, but will never exceed 9.0%.

As a side note, all the loans above are available to both undergraduate AND graduate students. As always, the best types of financial aid you can get are scholarships and grants (since you don’t have to pay them back!), and there are tons of resources available to find them like StudentScholarshipSearch and ScholarshipPoints. However, the subsidized Stafford loan is definitely the best option you can get as far as student loans go, and will cost the least over the course of your repayment.

*Credit Images to “Cmiper” on Flickr

ScholarshipPoints Code: MYSTERYGONE

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72 Responses to “Demystifying Federal Student Loans”

  1. Cherl says on May 5, 2010 at 3:55 pm:

    I heard the perkins loan is better than the unsubsidized stafford loan is that true?

    Reply To This Comment
    • Evan Jacobs says on May 5, 2010 at 4:19 pm:

      @ Cherl – At the moment, the interest rate and grace period are superior to the unsubsidized Stafford loan, yes. However, the Perkins loan has to be awarded to you by your school, so there is no guarantee you will be able to get one.

      Reply To This Comment
  2. Danielle says on April 29, 2010 at 9:29 pm:

    thank you it was very helpful

    Reply To This Comment
  3. Charlene says on April 29, 2010 at 2:53 am:

    this was very helpful, not i know what loan to choose

    Reply To This Comment
  4. Rachel Thomas says on April 26, 2010 at 8:41 pm:

    Wow. I never knew! This gave me sooo much info. Thanks! :)

    Reply To This Comment
  5. Allison says on April 25, 2010 at 4:06 pm:

    very helpful, thank you

    Reply To This Comment
  6. jerusalem says on April 20, 2010 at 8:15 pm:

    awesomely helpful thanks! :)

    Reply To This Comment
  7. Futsum Kahsay says on April 17, 2010 at 4:23 pm:

    Its interesting, I am in college and taking loans as well but I never knew the difference.

    Once again and again Thank you

    Reply To This Comment
  8. Adelaida says on April 12, 2010 at 5:21 am:

    I will have all of this in mind

    Reply To This Comment
  9. gsu student says on April 11, 2010 at 1:19 am:

    I never knew the difference between the various loans that appear on my award letter as the author of this article pointed out, but now I'm informed thanks to schlorship points.

    Reply To This Comment
  10. Any says on April 9, 2010 at 9:55 pm:

    Thanks for the great information, which is really helpfull.

    Reply To This Comment
  11. Jonathan says on April 10, 2010 at 12:30 am:

    Thank you, very helpful to know.

    Reply To This Comment
  12. dain says on April 9, 2010 at 5:46 pm:

    this is like heaven for lost seniors going to college

    Reply To This Comment
  13. Jonathan says on April 7, 2010 at 7:15 pm:

    This is very helpful information. Thank you for the clarification of sutdent loans and the differences of each loan.

    Reply To This Comment
  14. joselyn says on April 7, 2010 at 4:39 pm:

    Very helpful i had no i dea about these loans thank you!

    Reply To This Comment
  15. sabrina l says on April 5, 2010 at 1:28 am:


    Reply To This Comment
  16. rahim ladha says on April 5, 2010 at 12:44 am:

    very helpful. thank you

    Reply To This Comment
  17. Stacy says on April 2, 2010 at 9:13 pm:

    thank you so much. It was really helpful!

    Reply To This Comment
  18. jasmine says on April 1, 2010 at 5:51 pm:

    Helpful thanks.

    Reply To This Comment

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