Many students rely on federal government loans to finance their educations. These loans have low interest rates and do not require credit checks or collateral. Student loans also provide a variety of deferment options and extended repayment terms. Student loans include the Federal Stafford and Federal Perkins Loans.

Stafford Loan

The main federal loan for students is called the Stafford Loan and has two variations:

› Federal Family Education Loan Program (FFELP) loans are provided by private lenders, such as banks, credit unions and savings & loan associations.      › Citi Student Loans is one example of a private lender offering FFELP loans. These loans are guaranteed against default by the federal government. Federal Direct Student Loan Program (FDSLP) loans, administered by "Direct Lending Schools", are provided by the US government directly to students and their parents.

All Stafford Loans are either subsidized (the government pays the interest while you're in school) or unsubsidized (you pay all the interest, although you can have the payments deferred until after graduation). To receive a subsidized Stafford Loan, you must be able to demonstrate financial need. About 2/3 of subsidized Stafford loans are awarded to students with family AGI of under $50,000, 1/4 to students with family AGI of $50,000 to $100,000, and a little less than 10% to students with family AGI over $100,000.

With the unsubsidized Stafford loan, you can defer the payments until after graduation by capitalizing the interest. This adds the interest payments to the loan balance, increasing the size and cost of the loan. All students, regardless of need, are eligible for the unsubsidized Stafford Loan.

Repayment begins six months after the student graduates or drops below half-time enrollment. The standard repayment term is 10 years, although one can get access to alternate repayment terms (extended, graduated and income contingent repayment) by consolidating the loans.

Stafford Loan Limits

The following chart illustrates the annual and aggregate loan limits for the subsidized and unsubsidized Stafford loans first disbursed on or after July 1, 2008.

The limits may be a little confusing because there are two sets of limits for the Stafford loan: a combined base limit for the subsidized and unsubsidized Stafford loan, and an additional limit for just the unsubsidized Stafford loan. In effect, the subsidized Stafford loan is limited to the amounts in the "Combined Base Limit" column and the unsubsidized Stafford loan is limited to the amounts in the "Total Limit" column minus the amount of any subsidized Stafford loans.

Many students combine subsidized loans with unsubsidized loans to borrow the maximum amount permitted each year.

Note also that there are separate limits for dependent undergraduate students, independent undergraduate students, graduate and professional students, and medical school students. Dependent undergraduate students whose parents have been denied a Parent PLUS loan are eligible for the higher unsubsidized Stafford loan limits available to independent undergraduate students.

Annual Loan Limits - Stafford Loan
Dependent Students (whose parents were not denied a PLUS loan)	Combined Base Limit for Subsidized and Unsubsidized Loans	Additional Limit for Unsubsidized Loans	Total Limit for Unsubsidized Loans (minus subsidized amounts)
First-Year Undergraduate (Freshman)	$3,500	$2,000	$5,500
Second-Year Undergraduate (Sophomore)	$4,500	$2,000	$6,500
Third-Year and Beyond Undergraduate (Junior, Senior)	$5,500	$2,000	$7,500
Preparatory Coursework (for enrollment in an undergraduate program)	$2,625	$0	$2,625
Preparatory Coursework (for enrollment in a graduate or professional program)	$5,500	$0	$5,500
Teacher Certification Coursework	$5,500	$0	$5,500
Independent Students (and dependent students whose parents were denied a PLUS loan)	Combined Base Limit for Subsidized and Unsubsidized Loans	Additional Limit for Unsubsidized Loans	Total Limit for Unsubsidized Loans (minus subsidized amounts)
First-Year Undergraduate (Freshman)	$3,500	$6,000	$9,500
Second-Year Undergraduate (Sophomore)	$4,500	$6,000	$10,500
Third-Year and Beyond Undergraduate (Junior, Senior)	$5,500	$7,000	$12,500
Preparatory Coursework (for enrollment in an undergraduate program)	$2,625	$6,000	$8,625
Preparatory Coursework (for enrollment in a graduate or professional program)	$5,500	$7,000	$12,500
Teacher Certification Coursework	$5,500	$7,000	$12,500
Graduate and Professional Students	Combined Base Limit for Subsidized and Unsubsidized Loans	Additional Limit for Unsubsidized Loans	Total Limit for Unsubsidized Loans (minus subsidized amounts)
Graduate and Professional Students	$8,500	$12,000	$20,500
Medical School Students	$8,500	$32,000	$40,500

Aggregate Loan Limits - Stafford Loan
	Combined Base Limit for Subsidized and Unsubsidized Loans	Additional Limit for Unsubsidized Loans	Total Limit for Unsubsidized Loans (minus subsidized amounts)
Dependent Undergraduate Students (whose parents were not denied a PLUS loan)	$23,000	$8,000	$31,000
Independent Undergraduate Students (and dependent students whose parents were denied a PLUS loan)	$23,000	$34,500	$57,500
Graduate and Professional Students	$65,500 (including undergraduate Stafford loans)	$73,000	$138,500
Medical School Students (Effective 4/18/08 per DCL GEN-08-04	$65,500 (including undergraduate Stafford loans)	$158,500	$224,000

Stafford Loan Interest Rates and Fees

Stafford Loans have a fixed interest rate of 6.8% for loans with a first disbursement after July 1, 2006. (Previously, Stafford Loans had variable interest rates (based on 91-day T-bill rate + 1.7% during school with an additional 0.6% increase upon graduation) capped at 8.25% or less, depending on yearly adjustments.) All lenders offer the same rate for the Stafford Loan, although some give discounts for on-time and electronic payment.

The College Cost Reduction and Access Act of 2007 reduced the interest rates on subsidized Stafford loans for undergraduate students starting July 1, 2008. These reductions are available only to undergraduate students, not graduate students, and only for subsidized Stafford loans, not unsubsidized Stafford loans. The interest rates are illustrated in the following table.

Phased-in Cuts in Interest Rates on Subsidized Stafford Loans for Undergraduate Students
Year	Interest Rate Subsidized Stafford Loans (Undergraduate Students)	Interest Rate Other Stafford Loans (Graduate or Unsubsidized)
2007-08	6.8%	6.8%
2008-09	6.0%	6.8%
2009-10	5.6%	6.8%
2010-11	4.5%	6.8%
2011-12	3.4%	6.8%
2012-13	6.8%	6.8%

Stafford Loans have loan fees of 4%, which are deducted from the disbursement check. These fees consist of a 3% origination fee and a 1% default fee (previously "guarantee fee"). Starting July 1, 2006, the default fee will be mandatory. (Previously, guarantee agencies could waive the fee and many did.) The origination fee will drop from 3% to 2% on July 1, 2006, and will drop by a further 0.5% each successive July 1, until it is phased out entirely on July 1, 2010.

Applying for a Stafford Loan

To apply for a Stafford Loan, you must submit the Free Application for Federal Student Aid (FAFSA). Even though the unsubsidized Stafford Loan is available to all students regardless of financial need, you must still submit the FASFA to be eligible. You can receive a subsidized loan and an unsubsidized loan for the same period.

You may use the Lender Codes Database to obtain the lender codes of participating student loan providers. If you are a student attending a school that participates in the Federal Direct Student Loan Program you will obtain your federal student loan funds directly from the U.S. government, not from private lenders.

Perkins Loan

The Perkins Loan is awarded to undergraduate and graduate students with exceptional financial need. This is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government. (The Perkins Loan is the best student loan available. It is a subsidized loan, with the interest being paid by the federal government during the in-school and 9-month grace periods. There are no origination or default fees, and the interest rate is 5%. There is a 10-year repayment period.

The amount of Perkins Loan you receive is determined by your school's financial aid office. The program limits are $4,000 per year for undergraduate students and $6,000 per year for graduate students, with cumulative limits of $20,000 for undergraduate loans and $40,000 for undergraduate and graduate loans combined.

The Perkins Loan also offers better cancellation provisions than the Stafford or PLUS loans.

Parent Loans

Parents of dependent students can take out loans to supplement their children's aid packages. The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance. There is no cumulative limit. Like the Stafford Loan, PLUS loans are either FFELP (provided by private lenders, such as banks) or Direct (funds provided by the government).

Parent PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan, but fails to make the payments on time, the parents will be held responsible.

Starting on July 1, 2006, graduate and professional students can borrow money through the PLUS Loan program to pay for their own education.

These days the PLUS loan is referred to as either the Parent PLUS or Grad PLUS loan. The original name, Parent Loan for Undergraduate Students, is no longer used, not even in the Higher Education Act.

Interest Rates and Fees

PLUS Loans within the FFEL program have a fixed interest rate of 8.5% for loans with a first disbursement after July 1, 2006. (Previously, PLUS loans had variable interest rates (based on 52 week T-bill rate + 3.10%) capped at 9%.) Within the Direct Loan program the PLUS loans have a fixed interest rate of 7.9%. The interest is not subsidized while the student is in school, unlike the subsidized Stafford and Perkins loans. The PLUS loan charges loan fees of 4%, deducted from each disbursement check. All lenders offer the same rate for the PLUS Loan, although some give discounts for on-time and electronic payment.

Repayment

Repayment begins 60 days after the funds are fully disbursed, and the repayment term is up to 10 years. Graduate students may defer repayment while they are in school. There is no six-month grace period as there is with the Stafford Loan program. However, the Ensuring Continued Access to Student Loans Act of 2008 (PL 110-227), ECASLA, added the option for parents to defer payments on the Parent PLUS loan while the undergraduate student on whose behalf they borrowed the PLUS loan is in-school and for a six-month grace period after the student graduates or drops below full-time enrollment. (Payments can also be deferred if the parents are themselves enrolled in college. They will need to submit an application for an in-school deferment.) Note that since the interest on the PLUS loan is not subsidized, it continues to accrue while deferred and is capitalized when the loan enters repayment.

Consolidating PLUS Loans

PLUS loans can be consolidated just like Stafford and Perkins Loans, although a parent's PLUS loan cannot be consolidated with the student's Stafford and Perkins Loans, since the borrowers are different. But parents who have their own Stafford loans can consolidate them together with any PLUS loans they have borrowed to pay for their children's education.

Consolidating PLUS loans provides access to alternate repayment terms, such as extended repayment, graduated repayment, and income contingent repayment.

Note that since the consolidation loan has an interest rate that is capped at 8.25%, consolidating your FFELP PLUS loans can reduce the interest rate by 0.25%. It is best to consolidate PLUS loans separately from Stafford and Perkins Loans to maximize the benefit of this interest rate reduction. However, one should also consider the impact of consolidation on available education loan discounts.

Eligibility

Eligibility for the PLUS loan depends on a modest credit check that determines whether the parent as an adverse credit history. An adverse credit history is defined as being 90 or more days late on any debt or having any Title IV debt (including a debt due to grant overpayment) within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off. The Ensuring Continued Access to Student Loans Act of 2008 extended the 90 days late threshold to 180 days for mortgage payments and medical bill payments during calendar years 2007 through 2009.

If a dependent student's parents are denied a PLUS loan, or the college financial aid administrator determines that the parents are likely to be denied a PLUS loan, the student becomes eligible for increased unsubsidized Stafford Loan limits. Only one parent needs to apply for and be denied a PLUS loan. However, if one parent is denied a PLUS loan and the other is approved for a PLUS loan, the student is not eligible for increased Stafford Loan limits.

It is generally a good idea for parents who think they might be denied a PLUS loan or have other exceptional circumstances that prevent them from using the PLUS loan program to talk to the school before applying for a PLUS loan. If they happen to obtain a PLUS loan approval it makes it much more difficult for the school to grant the student the additional unsubsidized Stafford loan eligibility. The specific language at 34 CFR 682.201(a)(3) is:

For purposes of a dependent undergraduate student's eligibility for an additional unsubsidized Stafford loan amount, as described at 34 CFR 682.204(d), is a dependent undergraduate student for whom the financial aid administrator determines and documents in the school's file, after review of the family financial information provided by the student and consideration of the student's debt burden, that the student's parents likely will be precluded by exceptional circumstances (e.g., denial of a PLUS loan to a parent based on adverse credit, the student's parent receives only public assistance or disability benefits, is incarcerated, or his or her whereabouts are unknown) from borrowing under the PLUS Program and the student's family is otherwise unable to provide the student's expected family contribution. A parent's refusal to borrow a PLUS loan does not constitute an exceptional circumstance.

If the dependent student receives the additional unsubsidized Stafford loan eligibility and the parent subsequently receives a PLUS loan, the student will not receive any subsequent disbursements on the additional unsubsidized Stafford loan but may retain any amounts already disbursed. Subsequent Stafford loan disbursements revert to the lower unsubsidized Stafford loan limits without considering any excess amounts received under the higher unsubsidized Stafford loan limits. The annual cap on the PLUS loan must consider the total amount of Stafford loan disbursements under the cost-of-attendance minus aid received cap.

Applying for a PLUS Loan

Graduate and professional students who are applying for a PLUS loan must submit the Free Application for Federal Student Aid (FAFSA) and sign a master promissory note

Parents who are applying for a Parent PLUS loan are, strictly speaking, not required to have the student file a FAFSA. However, it is generally advisable to do so in order to avoid missing out on other federal student aid. But if they wish to apply for a Parent PLUS loan without submitting a FAFSA, they will need to submit a loan application and sign a master promissory note. (The usual requirements for student and parent eligibility still apply, per 34 CFR 682.201(c). For example, the student must be enrolled at least half-time and be eligible for federal student aid. Both the parent borrower and the student must be US citizens, nationals or eligible noncitizens. Neither the student nor the parent borrower can have a federal government judgment lien on his or her property. The parent cannot owe an overpayment on a federal education grant or be in default on a previous federal education loan unless he or she has made satisfactory arrangements to repay the grant overpayment or loan. The student is required to be registered with Selective Service, but the parents are not. Colleges are required to determine eligibility for both the dependent student and the parent before certifying a Parent PLUS loan. Besides obtaining the student's complete financial aid history, the school may also have supplemental forms for the parent to complete, such as signing a statement of educational purpose.)

If the student's parents are divorced, both the custodial parent and the noncustodial parent are eligible to borrow from the PLUS loan program, provided that the combined amounts borrowed do not exceed the cost-of-attendance minus aid received cap. A stepparent who has not adopted the student can only borrow from the PLUS loan program for as long as he or she is married to the custodial parent (i.e., the stepparent's income and assets would be considered when calculating the dependent student's expected family contribution). A stepparent who is married to the dependent student's non-custodial parent is not eligible to borrow from the PLUS loan program. Legal guardians are not eligible to borrow from the PLUS loan program. See 34 CFR 682.201(c)(3) and 34 CFR 668.2 "parent".

Finding a PLUS Loan Lender

Parents who are considering a PLUS loan also often consider a home equity loan or an alternative loan. There are several tradeoffs between these options.

Lenders may allow parents to defer payments on the PLUS loan while the student is in school by granting one of several types of forbearances. In each case the forbearance allows a full or partial suspension of payments for up to a year at a time. Interest continues to accrue during the forbearance even if payments of interest are suspended, but is usually capitalized only at the end of the forbearance. The discretionary forbearance can be renewed each year; the economic hardship deferment and excess debt burden forbearances each have a three-year time limit.