A college loan (or student loan) is a form of financial aid for students attending a post-secondary institution (generally a college or university). This form of aid must be repaid. The intent of college loans is to bridge the gap between the cost of attendance and the student's ability (with his/her parents' assistance) to pay for the education.

In the United States, there are two major types of college loans: federal loans and private/alternative loans. Federal loans are either subsidized or guaranteed by the U.S. Department of Education. These loans generally have lower interest rates, more generous repayment policies, and do not generally require a credit check to obtain. Private loans are obtained by agreement with a bank, credit union, or other lending agency. These loans usually require a positive credit history and/or a co-signer, have higher rates, and may require payments while the student attends school. The advantage of private loans is that they are paid directly to the student, allowing him/her to use it as he/she sees fit.

Federal Loans

In order to apply for a federal loan, you must meet the following requirements:

  • You must demonstrate that you are qualified to enroll in a postsecondary institution. The most common method of demonstrating this qualification is through the completion of a high school diploma or GED.
  • You must be enrolled as a regular student working toward a degree or certificate at an accredited institution of higher learning, and must continue to meet satisfactory academic progress at that institution.
  • You must be a United States citizen, a U.S. national, or a U.S. permanent resident, and you must have a valid Social Security number.
  • You cannot be currently in default on a federal student loan or owe money on a federal student grant.
  • If you are a male between the ages of 18 and 25, you must be registered with Selective Service.
  • You must not be currently incarcerated for a crime. Additionally, some convictions will disqualify you for federal financial aid.
  • You must complete the Free Application for Federal Student Aid (FAFSA) for each year in which you wish to apply for a loan.

There are a few types of federal loans available. The terms differ for each type of loan. Qualifications for the loans may depend on financial need (noted as need-based below), and may also be determined by the financial aid officer for the institution.

  1. Federal Perkins Loan (need-based)
    • Currently has a 5 percent interest rate.
    • The school is the lending institution, payments are made to the school.
    • The maximum annual benefit is $4,000 for undergraduate students, $6,000 for graduate students.
    • Repayment terms for the loan may be made for up to 10 years.
  2. Federal Stafford Subsidized Loan (need-based)
    • Interest changes annually, the interest rate for the 2005-06 school year was 5.3 percent.
    • The U.S. Department of Education pays the interest fees while the borrower is attending school, as well as during the grace period (6 months after leaving school) and during a deferment period.
    • Maximum Benefit:
      • First Year (Undergraduate): $2,625/year
      • Second Year (Undergraduate): $3,500/year
      • Third+ Years (Undergraduate): $5,500/year
      • Graduate Students: $8,500/year
      • Maximum lifetime benefit: $65,500
    • Borrower must be at least a half-time student to qualify for this loan.
    • Repayment terms for the loan may be between 10 and 30 years.
  3. Federal Stafford Unsubsidized Loan
    • Interest changes annually, the interest rate for the 2005-06 school year was 5.3 percent.
    • The borrower is responsible for all interest fees. He/she can choose to pay the interest fees while attending college, or can defer the fees, adding them to the principal of the loan.
    • Maximum Benefit:
      • First Year (Undergraduate): $6,625/year
      • Second Year (Undergraduate): $7,500/year
      • Third+ Years (Undergraduate): $10,500/year
      • Graduate Students: $18,500/year
      • Maximum lifetime benefit: $138,500
    • Borrower must be at least a half-time student to qualify for this loan.
    • Repayment terms for the loan may be between 10 and 30 years.
  4. Federal PLUS Loan
    • This loan is taken out by the parents of the student on his/her behalf.
    • Available only for undergraduate students.
    • Beneficiary must be at least a half-time student to qualify for this loan.
    • Repayment terms for the loan may be between 10 and 30 years.
    • Interest changes annually, the interest rate for the 2005-06 school year was 6.1 percent.
    • Parents must have a non-negative credit history.

College loans can be a very difficult decision for a student to make. On one hand, many students find that their quality of life is impacted by the loan payments for many years after they graduate from college. On the other hand, as my economics professor put it, our future value will most likely be far greater than our present value, so economically speaking, it is usually a good idea to take out a loan and take advantage of that fact.

For more information on college loans, contact the financial aid department for your college/university.

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