Before a student applies for a college loan, he or she should fill out a Free Application For Student Aid form. The FAFSA is instrumental in determining a student's eligibility for financial aid and opens the door to both federal student aid loan programs, as well as many private sources of funding. Without a FAFSA application, a student won't even be considered for many loans, making it a crucial first step in the financial aid process.
A Perkins Loan is a loan sponsored by the federal government and awarded to students with the lowest incomes. The interest rate is fixed at 5 percent and a student is not required to make payments while in school. A Perkins Loan must be repaid in 10 years and interest does not begin to accrue until the payments start. Recent graduates have a nine-month grace period in which to begin repaying the loan.
Two types of Federal Stafford Loans are available to students: subsidized and unsubsidized. Like the Perkins Loan, the Subsidized Stafford Loan is awarded to students based on need. The fixed interest rate (currently 4.5 percent but increasing to 6.8 percent on July 1, 2012) is paid for by the government while the student is enrolled in school. With an Unsubsidized Stafford Loan, the fixed interest rate is currently higher (6.8 percent) and interest payments must be made while the student is in school, unless they choose to capitalize the interest by having it added to the principle and repaid following graduation.
Federal Parent PLUS Loans are available to parents seeking assistance in paying for their children's education. By far the biggest source of parent loans, PLUS Loans have a fixed interest rate of 7.9 percent. Parents are allowed to borrow up to the total cost of their child's education, minus any additional sources of financial aid. Federal PLUS Loans are not allocated on a needs basis.
While federal student loans are popular, they are not the only sources of loans available to college students. Many private education loans are available through banks and credit unions. Interest rates tend to be higher, but if a federal loan isn't available these are excellent alternatives. Colleges sometimes have their own private loans available and their interest rates can be quite competitive; check with the financial aid office for details. Finally, loans are available through many private organizations and their interest rates may be even lower than the federal loans.