Student Loans Overview

The federal government provides various types of student loans to help promote access to higher education. The common goal among the different loans is that they allow students to obtain financing for higher education at better terms than those available in the private market. In this regard, the federal government subsidizes the cost of loan for the borrower. Students usually have little or no credit or employment history and no collateral with which to secure a loan to finance a higher education. In response, the federal student loan programs entitle virtually all students to loans with below-market interest rates and flexible repayment options. Furthermore, loans are available to borrowers without respect to income, choice of institution, field of study, or academic performance (except in limited cases). Loans are available for two- and four-year undergraduate study, and graduate study.

Types of Federal Student Loans

Stafford Loan

Stafford loans are available to all undergraduate and graduate students. Interest rates on loans taken out after July 2007 are fixed at 6.8 percent. Loans originated earlier carry variable interest rates. Students can borrow up to the cost of attendance, but no more than $5,500 in their first year, $6,500 in the second year, and $7,500 each year thereafter. (Borrowers with parents who are ineligible for a PLUS loan may borrow more. The limit is raised to $6,000 for first and second year students, and to $7,000 each year thereafter.) Graduate students may borrow no more than $20,500 each year. Borrowers do not need to make payments (principal or interest) on the loans while in school. Loans generally must be paid back over 10 years once a borrower leaves school.

Stafford Loan - Subsidized

Subsidized Stafford loans are the same as unsubsidized Stafford Loans, except (a) interest rates are lower for undergraduate borrowers, and (b) interest does not accrue for both undergraduates and graduate students while the borrower is in school. A dependent undergraduate student qualifies if his or her parents meet financial eligibility requirements. Independent undergraduate and graduate students qualify if they themselves meet financial eligibility requirements. Beginning in academic year 2008-2009, interest rates on Subsidized Stafford loans will be reduced each year until rates reach 3.4 percent in 2011-2012. The lower interest rates will apply only to new loans originated each year and not to previously issued loans. The table below illustrates the scheduled interest rate reductions. Subsidized Stafford loans originated in academic year 2012-2013 and thereafter will carry an interest rate of 6.8 percent. This policy was adopted in the College Cost Reduction and Access Act of 2007, a budget reconciliation bill.

PLUS Loan

Parents of undergraduate students who attend college are eligible for federal PLUS loans and may borrow an amount up to the cost of the student’s attendance – which includes tuition, housing, and other expenses. PLUS loans are not subject to a specific dollar limit like Stafford loans. PLUS loans carry a fixed 8.5 percent interest rate (7.9 percent for PLUS loans delivered through the Direct Loan program). Unlike Stafford loans, parents must satisfy a credit check. Loans generally must be paid back over 10 years.

Grad PLUS Loan

Graduate students may borrow PLUS loans for themselves under the same terms that the loans are provided to parents of dependent undergraduates. Grad PLUS loans are meant for borrowers who exhaust eligibility for Stafford loans.

Consolidation Loan

All federal student loans can be consolidated into one loan after a borrower leaves school. The interest rate on the loan is fixed, and is set at the weighted average of the interest rates on the underlying loans. Consolidation loans also offer extended repayment terms depending on the total value of the loan.

Perkins Loan

The Perkins Loan program is separate and distinct from Stafford loans. Loans are made to students from lower income families by a participating college or university. Schools have some discretion in determining which students receive a Perkins loan and the size of the loan offered.

Funding for Perkins loans is provided by the federal government directly to colleges and universities, which must match one-third of the funding. The funding establishes a revolving loan fund, from which new loans are made as older loans are repaid. Repayment can be no longer than 10 years, interest rates are fixed at 5 percent, and annual borrowing limits are set at $4,000 for undergraduates and $6,000 for graduate students. The federal government also provides separate funding to forgive Perkins Loans if borrowers are employed in certain high-need jobs.

Program Structure: Guaranteed vs. Direct Lending

All of the loans listed above - except Perkins Loans - are provided through one of two different administrative structures. Loans are provided: (1) by banks, guaranteed and subsidized by the federal government, and (2) by the federal government itself lending directly to students. Colleges decide which program will administer the federal loans that their students borrow. More information on the two loan program structures is available here.