Demystifying Federal Student Loans | 02.11.10

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

Bill IIBill I

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

5 Most Recent Student Loans Blog Posts:

The Student Loan Help blog is sponsored in part by:

72 Responses to “Demystifying Federal Student Loans”

  1. Brian says on April 1, 2010 at 12:25 am:

    Thank you for the information and distinctions between the different types of loans out there. I did not know some of the loans even existed. It did clarify certain questions I possessed bfore the reading took place.

    Reply To This Comment
  2. Raya says on March 25, 2010 at 9:08 pm:

    Can a student loan damage my credit score? And if I get a student loan for all 5 years im in college how much money would I have to pay back per month once I graduate?

    Reply To This Comment
  3. Matt says on March 22, 2010 at 2:39 am:

    Very helpful!

    Reply To This Comment
  4. Nicholas says on March 20, 2010 at 8:12 pm:

    Thank you so much for listing and explaining all of my financial aid options as far as loans.

    Reply To This Comment
  5. Melissa says on March 14, 2010 at 2:52 am:

    thanks, very imformative

    Reply To This Comment
  6. Carol says on March 12, 2010 at 6:08 pm:

    Thank you…very helpful!

    Reply To This Comment
  7. Angelica says on March 9, 2010 at 9:56 pm:

    Really thanks!

    Reply To This Comment
  8. Paulette says on March 9, 2010 at 7:17 pm:

    This information was what I was looking for. With this info I feel very confident, but would prefer other options to taking a loan. Thanks.

    Reply To This Comment
  9. Laurie says on March 5, 2010 at 5:05 am:

    This blog definitely demystifies the differences between federal student loans. Thank you for offering this information to current and future borrowers.

    Reply To This Comment
  10. shannon says on March 3, 2010 at 9:18 pm:

    reading this makes me feel overwhelmed when i think about my loans but i need them and thankgoodness i can get them!

    Reply To This Comment
  11. Coka says on March 3, 2010 at 9:12 pm:

    im not sure about loans just yet

    Reply To This Comment
  12. amanda says on March 3, 2010 at 12:33 am:

    Thanks! This information was very helpful. I will definately use it.

    Reply To This Comment
  13. Dei says on March 2, 2010 at 7:00 pm:


    Reply To This Comment
  14. Aaron Callahan says on March 1, 2010 at 8:20 pm:

    Very Informative

    Reply To This Comment
  15. Anjanae says on March 1, 2010 at 6:20 am:

    easy to understand

    Reply To This Comment
  16. pakoulee says on February 28, 2010 at 8:56 pm:

    wow..thats intresting

    Reply To This Comment
  17. Mary says on February 27, 2010 at 10:12 pm:

    This was really helpful.

    Reply To This Comment
  18. Brittany says on February 26, 2010 at 4:31 pm:

    my first time choosing which loans i was going to apply for was so hard. this is a huge help though and will make things so much easier.

    Reply To This Comment
  19. Chris says on February 26, 2010 at 1:08 am:

    this cleared some questions that i had about these loans.

    Reply To This Comment
  20. Rebecca says on February 23, 2010 at 7:52 pm:

    Helpful and easy to understand.

    Reply To This Comment
  21. Calvin says on February 23, 2010 at 6:43 pm:

    thanks for info and points

    Reply To This Comment
  22. Yaneli says on February 17, 2010 at 1:49 am:

    I remeber the first time I saw my FAFSA report, gah it was not pretty! This article is very helpful, nice job.

    Reply To This Comment
    • Evan Jacobs says on February 22, 2010 at 5:14 pm:

      I'm glad you found it useful. Feel free to pass it on if you think a friend could use it… there are social media buttons on the top right for you :-)

      Reply To This Comment
  23. Eilbra says on February 17, 2010 at 1:24 am:


    Reply To This Comment
  24. mary says on February 16, 2010 at 11:17 am:

    Im scared i wont be able to pay them back :(

    Reply To This Comment
  25. mary says on February 16, 2010 at 11:16 am:

    I dont prefer loans. Sometimes i get scaed that i wont be able to pay them back

    Reply To This Comment

Leave a Reply

By clicking 'Submit Comment', you agree to the Edvisors Terms of Use and Privacy Policy.