What are the best student loans?


Federal student loans are generally the best type of student loans you can get.

They offer better terms than private loans and don't require parents to co-sign in order to guarantee that the loan will be paid (although parents generally must provide their financial information on the Free Application for Federal Student Aid form anyway).

There are three kinds of federal student loans for undergraduates. And while each has their perks -- some carry better rates, while others are easier to get -- they all carry one big risk. Unlike almost any other kind of loan (credit card advances, mortgages on houses, etc.), it is very difficult to free yourself of student loan debt if you get into financial trouble and file for bankruptcy.

Even troubled borrowers who sign up for the new income-based repayment option have to make on-time payments for at least 10, or as many as 25, years before getting out from under their student loan debt.

Here's what you need to know about each of the federal student loan options:

Perkins loans

How much can I borrow? Up to $5,500 a year.

How much do Perkins loans cost? As of early 2012, Perkins loans charge no interest and don't require any payments while the student is attending school. Six months after the student leaves school, the loan starts coming due, and charges an interest rate of just 5%.

Perkins borrowers who go into public service, such as teaching, police work or the Peace Corps, can have some of their loans cancelled or forgiven.

Unlike other federal student loan programs, each school has a limited amount of Perkins money to lend. So you may be eligible for a Perkins loan at one school, but not at another.

Subsidized direct Stafford loans

Students attending college at least half-time whom the government judges cannot afford the full cost of their college can get a subsidized Stafford loan.

These loans are made directly from the federal government to eligible students if they attend a participating school. Some community colleges don't participate in the federal lending program.

How much can I borrow in subsidized direct Stafford loans? Up to $3,500 for freshman year, $4,500 for sophomore year and $5,500 each for junior and senior years.

How much does a subsidized direct Stafford loan cost? There is a 1% up-front fee when the loan is made. After that, subsidized Stafford loans charge no interest and require no payments while the student is in school. As of the fall of 2012, interest on the loans will start accruing as soon as you graduate or drop out. For subsidized direct Stafford loans made in the 2012-13 academic year, the loans will charge annual interest of 6.8%.

Bills start coming due six months after you leave college. During the 6-month grace period, students can sign up for income-based repayment to make sure their payments never exceed 15% of income. All Stafford borrowers who sign up for IBR and take public service jobs may have some of their remaining loans forgiven after 10 years of payments.

Unsubsidized direct Stafford loans

Students who need to borrow more than the subsidized Stafford maximums can borrow an additional amount of at least $2,000 a year through the unsubsidized Stafford loan program.

How much can I borrow? At least $5,500 freshman year, $6,500 sophomore year, and $7,500 in each upper class year. Students whose parents have been rejected for a PLUS loan, or who qualify as independent (generally, over the age of 23), can borrow up to $9,500 as freshmen, $10,500 as sophomores and $12,500 each upper class year.

How much do unsubsidized direct Stafford loans cost? Students don't have to make any payments while they attend school at least half-time, but unsubsidized Stafford federal student loans charge an initial 1% fee and start building up annual interest of 6.8% almost immediately. The total annual percentage rate adds up to 7.02%.

For both unsubsidized and subsidized Stafford loan borrowers, payments are deferred until six months after the student has left school. Stafford borrowers can sign up for income-based repayment and make sure their payments never exceed 15% of income.

How do you get a good student loan? The first step is to fill out the Free Application for Federal Student Aid.

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