Student Loans Demystified

NEWYou can now listen to Fox News articles!

Financial aid is quickly becoming a synonym for student loans. These days close to half the students in four-year colleges take out loans -- and it's a rare student that isn't confounded by the process. This section should help to clear up some of the confusion.

The three most common government-sponsored education loans are called Stafford loans, Perkins loans and Plus loans.

Stafford Loans are those that students borrow themselves. The rates are capped at 8.25% but can vary below that ceiling annually. Students who take out Staffords are limited to $2,625 the first year, $3,500 the second and $5,500 the third and fourth (and fifth, if need be) and $8,500 per year for graduate school. Eligible borrowers can get part or all of their loans subsidized -- meaning that the government pays the interest while you're in school. You don't start paying off the loan until six months after graduation.

Perkins Loans are the other type of federally subsidized student loans. They carry a fixed interest rate, currently 5%, which is deferred while the student is in college and the first six months after graduation. Undergraduates can borrow up to $4,000 a year, with a cap of $20,000. For graduate students, Perkins loans are capped at $6,000 per year and $40,000 overall, including any Perkins loans borrowed as an undergraduate.

Plus Loans are those the government sponsors for parents. The rates are capped at 9% but can vary below that ceiling annually. There's no limit on PLUS borrowing, but you have to start repaying the loan immediately. Some lenders may allow parents to pay.

There's more to getting a Stafford, Perkins or Plus loan than simply filling out the forms however. Before you borrow be sure to review these three important points:

Who Should Borrow, You or Your Child?
It used to be the student had to max out on Stafford loans before their parents could take on a PLUS. No more. Starting a few years ago, parents became eligible to borrow the entire cost of college whether or not their children took advantage of the Stafford program. But even if you plan on repaying the loan yourself, have your child borrow first. Students get the lower rate on Stafford loans and an attractive fixed rate on Perkins loans, and can defer the interest payments. Moreover, your child is more likely to benefit from the deductability of student loan interest. Singles who earn less than $65,000 and joint filers earning less than $135,000 can deduct at least part of their student-loan interest charges up to a maximum of $2,500. Finally, some employers agree to help new hires pay their educational debts, so there's a chance your kid may get bailed out at work.

If you still need to borrow from the PLUS program, but your credit rating disqualifies you, you do have a fall back. Your child will be allowed to get unsubsidized Stafford loans subject to the same limits as subsidized ones. Graduate students are allowed to borrow up to $10,000 per year.


What Lender Should You Choose?
If your college participates in the direct-student loan program then the choice is made -- you should get your loan through the college. But if you're looking for a private lender there can be vast differences among the various institutions that offer student loans. Be sure to ask any lender you're considering the following questions:

Before You Pay Up
You want a lender that has a variety of repayment options. The most common repayment plan is a fixed amount per month for 10 years. But some lenders are also offering graduated plans that assume your child's income will rise the longer he or she is out of school. This plan allows your child to increase his or her monthly payment in two to three stages. And, with some lenders, students can consolidate their loans to increase the repayment time from 10 to, say, 20 years at a slightly higher interest rate.

All lenders will let your child defer payments if he or she decides to go back to school -- they must be enrolled at least half time -- or take up volunteer work. Unemployment, internships and fellowships may also entitle your child to defer. And all lenders are required to allow up to 24 months of hardship "forbearance."