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Types of Loans

 

The four most common student loans are Subsidized and Unsubsidized Stafford loans, PLUS loans, and Perkins Loans:

 

Subsidized Stafford Loans are issued on a need basis, as determined by the FAFSA (Free Application for Financial Student Aid).  Interest on subsidized loans is paid by the government during in-school and deferment periods.  A six month grace period is available when a borrower leaves school or drops below half time enrollment.  Some subsidized Stafford loans will have their interest paid during grace as well.  However, if a subsidized Direct Stafford loan had funds first disbursed between July 1, 2012 and June 30, 2014, interest will not be paid during grace period and will be treated like the interest on unsubsidized loans.  The loans offer deferments and forbearances as payment relief.

 

Unsubsidized Stafford Loans are not issued on a needs basis.  The interest on these loans begins to accrue as soon as the funds are disbursed and will continue to accrue until the loans are paid in full.  Unpaid interest will be capitalized, meaning the amount is added into the loan’s principle.  This will increase both the monthly payment as well as the total cost of the loan.  Borrowers should try to pay their interest if at all possible, since this will provide significant savings over the loan’s life.  Even a partial interest payment will reduce the borrower’s overall loan cost.  The Unsubsidized Stafford Loans also offer the 6 month grace window.  It should be noted that the grace is a one-time option in the Stafford Loan programs.  If the borrower re-enrolls in-school during the 6 month grace period, current practice allows the borrower to have full grace returned. (It should be noted that past practices have had the grace period expire, whether on month or six months were used.  Another previous interpretation of the grace period was to apply the 6 month grace in split time frames – i.e. if the borrower was out of school 4 months, then re-enrolled, they would have two months of grace remaining when they dropped below half time or left school.) The loans also offer deferments and forbearances as payment relief.

 

Interest on Stafford Student Loans varies, based on the terms set by the various congress reauthorizations.  The most current interest rates may be found on http://www.mappingyourfuture.org/paying/staffordinterest.htm.  Since unpaid interest is capitalized into the loan’s principle, borrowers are encouraged to pay interest if at all possible.  Stafford loans may be pre-paid in full or part without penalty.

 

Perkins Loans are also need based, again as determined by the FAFSA.  Schools act as the lender, with the funds provided by the government.  Interest is fixed at 5% and, since these are exceptional need based loans, the interest is paid for the borrower during periods of in-school enrollment, grace and deferments.  However, interest accrues during periods of forbearance and during repayment.  If at all possible, the borrower is encouraged to pay interest during periods of forbearance, to prevent the capitalization of the interest.  There is a 9 month grace period for Perkins loans and deferments and forbearances are also available.  If you re-enroll in school during this grace period, you will receive an additional 9 month grace period.  If your initial grace period expires before re-enrollment, then your loans will have a six month grace period.  The minimum loan payment for a Perkins Loan is $40, although the actual amount will depend on the amount borrowed.  Perkins Loans may be pre-paid without penalty.