The best student loans are generally those offered by the federal government because they have lower interest rates than private loans. Some of the federal student loans are subsidized, meaning the federal government pays all the interest that accrues on the loan while the student is in school, in the grace period or in deferment.
Subsidized Stafford Loan
As of the 2011 to 2012 school year, the subsidized Stafford Loan has the lowest interest rates of any federal student loan. The interest rate for these loans is fixed at 3.4 percent and the interest only accrues after the student finishes school. However, students cannot borrow much through subsidized Stafford loans. First-year undergraduates can borrow up to $3,500, second-year students up to $4,500 and all other undergraduates up to $5,500 per year. Graduate students can borrow up to $8,500 per year in subsidized Stafford loans. All students who are interested in these loans must apply by submitting the Free Application for Federal Student Aid (FAFSA). Loans are offered to students who have significant financial need, as determined by the Department of Education.
Subsidized Perkins Loan
The Perkins Loan is the other type of subsidized federal student loan. Individual universities award and manage Perkins loans for students with financial need. Because each school has a limited amount of money to disburse, students who apply early have a better chance of receiving a Perkins Loan. The loans have a fixed interest rate of 5 percent and an annual borrowing limit of $5,500 per year for undergraduates and $8,000 per year for graduate students, as of 2011. Students should borrow with both Perkins and subsidized Stafford loans, if possible, before taking out any unsubsidized loans.
Unsubsidized Stafford Loan
All students, even those who have no financial need, can take out an unsubsidized Stafford Loan. However, students must fill out the FAFSA to receive a Stafford Loan offer. Therefore, even students from wealthy families should fill out the FAFSA if they are interested in student loans. Unsubsidized Stafford loans have a fixed interest rate of 6.8 percent, as of 2011. Although interest accrues on the loan while the student is in school, the student can make monthly interest payments while in school to avoid increasing the amount to repay later.
Unsubsidized PLUS Graduate Loan
Graduate and professional degree students can borrow with a PLUS Loan, which has a 7.9 percent interest rate, as of 2011. Although this loan has a higher interest rate than other federal student loans, it is still lower than most private student loans. In addition, graduate students can borrow as much money as needed to bridge the gap between other financial aid received and the total cost of attending school.
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