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. Steven says on February 15, 2010 at 1:11 pm:

    I don’t mind loans, but i wouldn’t prefer it. I rather pay of my school working or recive grants by doing some volunteering/acivites.

    Reply To This Comment
  2. Steven says on February 15, 2010 at 1:10 pm:

    i don’t really like lowns. I would like to recive grants or work my way through it since paying back along interest seems to just take out more from your pocket. I wouldn’t mind loans, but I wouldn’t prefer it.

    Reply To This Comment
  3. DeVon says on February 15, 2010 at 1:31 am:

    I will try all other methods first before applying for a loan.

    Reply To This Comment
  4. Terranc Savage says on February 14, 2010 at 4:45 pm:

    Cash is King.

    Reply To This Comment
  5. Judy says on February 14, 2010 at 4:37 pm:

    Great informative information for someone just starting college or looking into college funding – such as a high school student.

    Reply To This Comment
  6. Riley says on February 14, 2010 at 3:28 pm:

    I just started and I’m not sure what loans I shoud get?

    Reply To This Comment
  7. Samir says on February 14, 2010 at 8:43 am:

    Thanks for the information, it was really helpful.

    Reply To This Comment
  8. APRIL says on February 13, 2010 at 7:30 pm:

    Helpful article

    Reply To This Comment
  9. brittany says on February 13, 2010 at 3:53 pm:

    Thanks so much!!! i understand much better now :)

    Reply To This Comment
  10. Maia says on February 13, 2010 at 2:33 pm:

    Subsidized Stafford. I’ll have to remember that. Do they loan out for grad school too? What about PhDs?

    Reply To This Comment
  11. Darren Dwight says on February 13, 2010 at 2:27 pm:

    it for your future

    Reply To This Comment
  12. Darren says on February 13, 2010 at 2:25 pm:

    take out loans if you didnt recieve any free money

    Reply To This Comment
  13. Jennifer says on February 13, 2010 at 1:42 pm:

    have to pay them back

    Reply To This Comment
  14. Jennifer says on February 13, 2010 at 1:41 pm:

    one day you will have to pay them back

    Reply To This Comment
  15. Portia Rochelle says on February 13, 2010 at 12:16 pm:

    This information was helpful.

    Reply To This Comment
  16. Vicky says on February 12, 2010 at 11:05 pm:

    thanks for info

    Reply To This Comment
  17. Vicky says on February 12, 2010 at 11:05 pm:

    Loan can really help when you have no money.

    Reply To This Comment
  18. Isaias says on February 12, 2010 at 8:38 pm:


    Reply To This Comment
  19. Bonnie says on February 12, 2010 at 4:45 pm:

    If you don’t need to take out a loan, then don’t.

    Reply To This Comment
  20. Giovanni says on February 12, 2010 at 3:47 pm:

    Nice article.

    Reply To This Comment
  21. Christine says on February 12, 2010 at 3:28 pm:

    great article, very informatve.

    Reply To This Comment
  22. jadeha says on February 12, 2010 at 11:42 am:

    are loans bad?

    Reply To This Comment
    • Evan Jacobs says on February 12, 2010 at 11:48 am:

      @ Jadeha – Loans are tools to help you get what you want (in the case of this website, education), but you have to understand their implications. If you can justify the cost of borrowing money for your education… the federal ones are the best kind to get.

      Reply To This Comment
  23. maira says on February 12, 2010 at 11:02 am:

    it is really helpful but at the same time you could get debt and find a way out.

    Reply To This Comment
  24. Jayla Corbin says on February 12, 2010 at 9:47 am:

    But taking out too many loans is still a bad thing, right?

    Reply To This Comment
    • Evan Jacobs says on February 12, 2010 at 9:54 am:

      @ Jayla – Scholarships are always the best route… but if you HAVE to take out loans to pay for your education, always try for federal ones before you go to private student loans.

      Reply To This Comment
  25. best student loan says on February 12, 2010 at 6:43 am:

    i like your article, its really helpful

    Reply To This Comment

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