The Costs & Rewards of a College Education

Part 9 - The Basics of Financial Aid: Loans
Unlike grants, financial aid in the form of loans is required to be repaid.  However, students can take anywhere from 10 to 30 years to repay the loan depending on which loan is involved.

Federal Perkins Loan

Perkins Loans are another first-come, first-served option. The federal government only guarantees each school a certain amount of Perkins Loan money each year. This program is yet another reason for students to fill out FAFSAs as early as possible.

A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Federal Perkins Loans are made through a school's financial aid office. Your school is your lender, and the loan is made with government funds. You must repay this loan to your school.  Your school will either pay you directly (usually by check) or apply your loan to your school charges. You'll receive the loan in at least two payments during the academic year.

You can borrow up to $5,500 for each year of undergraduate study (the total you can borrow as an undergraduate is $27,500). For graduate studies, you can borrow up to $8,000 per year (the total you can borrow as a graduate is $60,000 which includes amounts borrowed as an undergraduate). The amount you receive depends on when you apply, your financial need, and the funding level at the school.

If you are attending school at least half time, you have nine months after you graduate, leave school, or drop below half time status before you must begin repayment.  This period of time is known as a grace period.  At the end of your grace period, you must begin repaying your loan.  You may be allowed up to 10 years to repay.

Perkins Loans also can be discharged or cancelled in full or in part for various reasons, including for graduates who are employed in specific teaching positions, certain public or non-profit family services jobs, and law enforcement or in military service in certain hostile areas.

Federal Stafford Loan

In addition to Perkins Loans, the U.S. Department of Education administers the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both the FFEL and Direct Loan programs consist of what are generally known as Stafford Loans (for students) and PLUS Loans for parents and graduate and professional degree students; PLUS Loans will be explained later.

Schools generally participate in either the FFEL or Direct Loan program but sometimes participate in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Funds for your FFEL will come from a bank, credit union, or other lender that participates in the program. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.

Federal Stafford Loans are the backbone of the Department of Education's self-help aid program for students. The advantage of Stafford Loans is that their interest rate is lower than what students or parents could get through a private lender. However, it's usually higher than the rate for a Perkins Loan. Stafford Loans are available to students enrolled in an eligible program at least half time and carry variable interest rates that are adjusted each July 1 for the following 12 months.

A Stafford Loan may either be subsidized or unsubsidized. Subsidized loans are based on financial need, and the federal government pays interest on the loans while the student is in school. Students pick up the payments on loan interest and principal six months after they graduate.

Students who do not show financial need, according to the Department of Education's guidelines, but still need more money for school, may qualify for an unsubsidized Stafford Loan. This type of loan does not offer the interest grace period. The borrower is responsible for interest charges beginning the date the loan is disbursed.

Students may take from 10 to 30 years to pay off their Stafford Loans, depending on the amount they owe and the type of repayment plan they choose. Under certain conditions you can receive a deferment or discharge of the loan.

Stafford Loan Interest Rates:

Academic Year    Subsidized Rates    Unsubsidized/Graduate Rates
2009 – 2010            5.60%                             6.80%
2010 – 2011            4.50%                             6.80%
2011 – 2012            3.40%                             6.80%
2012 – 2013            6.80%                             6.80%


New interest rate cap for Military Members

Interest rate on a borrower’s loan may be changed to six percent during the borrower’s active duty military service. This applies to both FFEL and Direct loans. Additionally, this law applies to borrowers in military service as of August 14, 2008.

Borrower must contact the creditor (loan holder) in writing to request the interest rate adjustment and provide a copy of the borrower’s military orders.


Stafford Loan Limits:

Dependent Students                         Annual Loan Limits
First Year                              $5,500 ($3,500 subsidized / $2,000 unsubsidized)
Second Year                         $6,500 ($4,500 subsidized / $2,000 unsubsidized)
Third Year and Beyond          $7,500 ($5,500 subsidized / $2,000 unsubsidized)

Independent Students                      Annual Loan Limits
First Year                               $9,500 ($3,500 subsidized / $6,000 unsubsidized)
Second Year                          $10,500 ($4,500 subsidized / $6,000 unsubsidized)
Third Year and Beyond          $12,500 ($5,500 subsidized / $7,000 unsubsidized)
Graduate or Professional        $20,500 ($8,500 subsidized / $12,000 unsubsidized)


Lifetime Limits
Undergraduate Dependent      $31,000 (Up to $23,000 may be subsidized)
Undergraduate Independent    $57,500
Graduate or Professional         $138,500 (Up to $65,000 may be subsidized) or $224,000 (for Health             Professionals)


PLUS Loans

The Federal PLUS Loan is a loan borrowed by a parent on behalf of a child to help pay for tuition and school related expenses at an eligible college or university, or by a graduate student for graduate school. The student must be enrolled at least half time, and the parent or graduate student must pass a credit check in order to receive this loan.

PLUS Loans are non-need based, which means you do not have to demonstrate financial need to qualify. Eligibility for the PLUS Loan depends on a modest credit check that determines whether the parent has adverse credit. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.

The primary benefit of the PLUS Loan is that a parent can borrow a federally guaranteed low interest loan to help pay for their child's education.  A Federal PLUS Loan allows a parent to borrow the total cost of undergraduate education including tuition, room and board, and any other eligible school expenses, minus any aid the child is receiving in their name.

PLUS Loan interest rates are fixed for all new PLUS Loans at a rate of 8.5%. These loans will not have variable interest rates.  You may receive a 0.25% repayment interest rate credit when payments are set up for automatic debit from a bank account.  Interest may be tax deductible under the Hope Education Tax Credit.  Repayment on a PLUS loan is 10 years; there is no penalty for early repayment, and consolidating your loans after each academic year is easy. It also lowers your monthly payment.

The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive.  For example, if your cost of attendance is $10,000 and you receive $8,000 in other financial aid, parents could borrow up to, but not more than, $2,000.

The Grad PLUS Loan is a low interest, federally backed student loan guaranteed by the U.S. Government, specifically for students enrolled in a degree seeking graduate program. Like the Parent PLUS Loan, the Graduate PLUS Loan can be used to pay for the total cost of education less any aid already awarded. Also, like the Parent PLUS Loan, eligibility for the Graduate PLUS Loan is largely dependent on the borrower's credit rating and history, as opposed to the purely financial need-based Graduate Stafford Loan.

Although many families prefer not to borrow money at all, it's important to remember that federal loans tend to have lower interest rates and more flexible repayment policies than other types of loans. Families who need to borrow money for college should be sure to exhaust all federal loan options before turning to private lenders.

Federal Work-Study

Federal Work-Study (FWS) provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient's course of study.

Participants are paid by the hour if an undergraduate. No FWS student may be paid by commission or fee. The school must pay you directly (unless you direct otherwise) and at least monthly. Wages for the program must equal at least the current federal minimum wage but might be higher, depending on the type of work done and the skills required. The amount earned cannot exceed the total FWS award. When assigning work hours, the employer or financial aid administrator will consider the award amount, the student’s class schedule, and their academic progress.

The school might have agreements with private for-profit employers for Federal Work-Study jobs. This type of job must be relevant to the student’s course of study (to the maximum extent possible). If the student is attending a career school, there might be further restrictions on the jobs you can be assigned.