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Different Types of Student Loans After You Graduate, Leave School or Drop Below Half-time Enrollment

Student loans are a form of financial aid that must be repaid, usually after you leave school. The federal government offers both subsidized and unsubsidized loans. The federal government pays the interest on subsidized loans while you are enrolled at least half time. For unsubsidized loans, you are responsible for paying the interest during enrollment. Federal law requires that new federal student loans whose first disbursement is after June 30, 2010, must come from the William D. Ford Direct Loan Program.

Direct Loans are funded directly by the federal government. Formerly, schools could choose to participate in the Direct Loan Program or Federal Family Education Loan Program, under which loans were funded by private lenders. The following describes terms for new Direct Loans.

Loan Type

Subsidized Stafford loans

Subsidized Stafford loans are based on financial need. The federal government pays the interest that accumulates on the loan while you're in school; during the grace period before repayment begins; and during periods of approved deferment. If you have a subsidized Stafford, you begin monthly payments on the principal and interest six months after you graduate, drop below half time, or withdraw from school. For loans taken out prior to June 30, 2006 the interest rate may change each year but may not exceed 8.25 percent. Beginning July 1, 2006 the interest rate on new loans will be fixed at 6.8 percent.

Unsubsidized Stafford loans

Unsubsidized Stafford loans are available to all qualified students, regardless of their families' incomes or financial need. If you have an unsubsidized Stafford, you are responsible for all the interest that accrues on the loan. Interest begins accumulating on the date the check is issued from the lender, but interest payments can be deferred. It's to your advantage to pay the interest while you're in school; this way, you will begin repayment on a lower principal when you leave school. Up to June 30, 2006 the interest rate may change each year but may not exceed 8.25 percent. As from July 1, 2006 the interest rate on new loans will be fixed at 6.8 percent.

Federal Perkins loans

Federal Perkins loans are very low-interest loans (5%) made through participating schools for students with financial need. You'll pay no interest while you're enrolled in school at least half time, and payments begin nine months after you graduate, leave school, or drop below half-time enrollment. Depending on the size of the loan, you'll have up to 10 years to repay.

Private Loans

Many banks, savings and loan associations, and credit unions offer a number of private loans for those students who feel that they need additional aid to attend college. These loans are based on creditworthiness, not income limitations, and may require a co-signer. The interest rate is higher than that of a Stafford loan, usually prime rate or above. In most cases the amount of the loan may not exceed the cost of attendance minus other financial aid. These loans, due to their higher interest rate, should be considered as a last resort in funding an education. Additional information may be found in the alternative loan tip sheet: Private Education Loan and Its Repayment Terms and Conditions

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