Student Loan Basics

There are two sources for student loans -- the federal government and private lenders. In order to obtain most federal student loans, you will first need to file the Free Application for Federal Student Aid (FAFSA). In most instances the FAFSA is required for all federal financial aid including federal student loans. There are four main federal loan programs:

• Federal Stafford Loan
• Federal PLUS Loan
• Federal Graduate PLUS Loan
• Federal Consolidation Loan

You can learn the ins and outs of each at their respective pages on this site. The Federal Stafford loan is made in the name of the student, is based on need (only the subsidized portion), does not require a credit check (it's guaranteed by a private guarantor and backed by the government rather than credit/income/assets, etc.) and does not have to be repaid until after the student graduates, leaves school or stops attending on at least a half-time basis. Some schools offer Stafford loan directly through the federal government. These are commonly known as Direct Stafford Loans. The schools that offer Direct Loans are known as Direct Lending Schools. Other schools offer Stafford loans through banks or other lenders. These schools are commonly called FFEL schools (Federal Family Education Loan). In order to obtain a federal Stafford loan through a FFEL school, you will need to choose a lender.

Federal PLUS loans are made in the name of a parent. While they do require a credit check, the credit criteria to obtain a PLUS are generally not as stringent as they are for other types of consumer loans since they are based on Federal requirements. Repayment of a PLUS loan begins after the loan is fully disbursed. PLUS loans disbursed on or after 7/1/2008 may have payments postponed while the student is in school at least half-time, however interest is still accruing. Be sure to read your loan disclosure and contact your lender if you would like to postpone the payment on your PLUS loan. Again, some schools offer PLUS through the federal government and others offer it through banks or other lenders.

The Federal Graduate PLUS is just like the PLUS for parents except that it is made in the name of a graduate or professional student. However, the student must apply for the maximum annual limit of the Stafford Loan before applying for the Graduate PLUS. It is important to remember that the Federal Graduate PLUS requires payment within 60 days after the loan is fully disbursed. Deferment options are available while you are still attending school at least half-time. Check with your financial aid office. (Note: Servicers usually will automatically place Grad PLUS loans in deferment).

Federal loan consolidation is for student borrowers who are in repayment status or parent borrowers who wish to extend the repayment period on their current PLUS loans and obtain a fixed interest rate for those loans which might have a variable interest rate. You can combine all of your eligible federal student loans into one loan with a Federal Consolidation Loan. Consolidating also locks the interest rate you pay on your loan. In addition, by consolidating you can possibly lower your payments by extending the length of the repayment period for your loan. However, with the extended term, you will end up paying more in interest over the life of the loan.

If federal loans are not enough to cover your educational expenses, or if you want a loan that is in the student's name, there are private student loans (sometimes called alternative student loans). Private loans are made by banks and other lenders. They must be used solely for education expenses. They do not carry the federal benefits which FFELP and Direct Loans offer and the interest rates can be higher than federal loans. In addition, you will need good credit and most students will need a qualified co-signer in order to obtain a private loan. Also, while interest rates, fees and other loan program terms are competitive, they vary widely from lender to lender. It is important to compare your options before choosing a private loan. Once you have found a loan that meets your needs, you can usually apply online and in many cases get an instant decision on approval.

The bottom-line with student loans is that you do have options when you cannot pay all of your college costs out-of-pocket.