What Are Student Loans?

"I want financial aid, not loans". How many times have you said or have heard someone say this? The truth is federal education loans are forms of financial aid. Unlike gift aid such as grants and scholarships, loans must be repaid with interest. Though this type of aid may not be a student's first choice, many students find that they must supplement their savings and other financial aid with student loans. With the rising costs of college education, grants, scholarships and other types of "free" money may not be enough to cover the full cost of college.

Most financial planners agree that if you're careful and don't take out too much, student loans, unlike car loans or credit cards, can be "good debt". That is, they represent an investment that will pay for itself. Understanding the different loan programs and borrowing wisely is key.

There are two programs that provide funding for these loans: Ford Direct Loan Program- funds provided by the federal government, and the Federal Family Education Program (FFELP) - funds provided by commercial lenders like banks, credit unions, and schools. Schools choose which program to participate in. Federal law sets the maximum interest rates and fees that lenders may charge for federal education loans.

There are three main types of federal education loans: Perkins loans, Stafford loans, and parent loans (also known as PLUS loans). Perkins loans have a fixed interest rate of 5% and go to the neediest families. Upon graduation, or dropping below half-time status, a student has a 9 month grace period before having to begin repayment. The Perkins loan program offers loan forgiveness and cancellation provisions (in which the borrower's loans are partially or entirely paid off in exchange for work in certain fields or military service). A student's eligibility for this loan program is based off of their need, or results from the FAFSA.

Stafford loans come in two forms: Subsidized and Unsubsidized. Subsidized loans are awarded based on need. The government pays the interest on the student's behalf while they are enrolled in classes at least half-time. Unsubsidized Stafford loans are awarded based on the cost of attendance (cost of going to college). Interest accruesfrom point of borrowing. Students can be awarded a combination of Subsidized and Unsubsidized loans. Starting in July 1, 2006, the interest rate for Stafford loans became fixed at 6.8%. The Stafford loan program offers a 6 month grace period upon graduation or dropping below half-time status before a student begins repayment. This program also offers loan forgiveness and cancellation programs.

Unlike Perkins and Stafford loans, Parent loans (PLUS) are taking in the parent(s) name and are applied to the student's cost of attendance. PLUS loan eligibility is based off of the parent(s) credit score. The minimum score varies by lenders. Beginning July 1, 2006 the fixed interest rate for PLUS loans is 8.5%. Some lenders offer a 6 month grace period before repayment must begin.

Education is worth the investment, and education loans represent an investment that will pay for itself. A student who graduates with $25,000 in student loans and gets a job paying $30,000 a year will have a higher standard of living than a student who doesn't attend college and has a job paying $20,000 a year. With proper budgeting, planning, and borrowing, college can be an attainable goal for all students.

Editorial provided by Becky Richardson, Nelnet College Planning and Gary Mann, SunTrust Education Loans.