Education Loans Come in Many Shapes and Sizes

There are lots of loan options out there. Read on for expert advice and information about all your options.

Some Facts

52 percent of all financial aid comes in the form of loans.
Some loans are need-based—meaning that they're awarded when the family demonstrates financial need.
Other education loans are not need-based. Instead, they're designed to help pay the family share of costs.

Some Advice

Need-based loans tend to have better terms, so you should consider those loans first.

Student Loans

There are four main types of federal student loans:

Perkins Loans are need-based loans and are awarded by the financial aid office to students with the highest need. The interest rate is very low—5 percent—and you don't make any loan payments while in school.

Subsidized Stafford Loans are need-based loans with a fixed interest rate of 6.8 percent. With subsidized loans the federal government pays the yearly interest while you're in school.

Unsubsidized Stafford Loans aren't based on financial need and can be used to help pay the family share of costs. You're responsible for paying interest on the loan while in school. You may choose to capitalize the interest. The advantage of doing this is that no interest payments are required. The disadvantage is that the interest is added to the loan, meaning that you will repay more money to the lender.

Grad PLUS loans are student loans for graduate students sponsored by the federal government that are unrelated to need. Generally, students can borrow up to the total cost of education, minus any aid received. The advantage of this loan is that it allows for greater borrowing capacity. However, students should consider lower-interest loans, such as the Subsidized Stafford or Unsubsidized loans prior to taking out a Grad PLUS loan.

Other Student Loan Options

Private student loans: A number of lenders and other financial institutions offer private education loans to students. These loans are not subsidized and usually carry a higher interest rate than the federal need-based loans.

College-sponsored loans: Some colleges have their own loan funds. Interest rates may be lower than federal student loans. Read the college's financial aid information.

Other loans: Besides setting up scholarships, some private organizations and foundations have loan programs as well. Borrowing terms may be quite favorable.

Parent Loans

Parents also have federal and college-sponsored loan options.

Federal PLUS loans: The PLUS Loan program is the largest source of parent loans. Parents can borrow up to the full cost of attendance minus any aid received, and repayment starts 60 days after money is paid to college.