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As the costs of higher education continue to rise, increasing numbers of students and parents are relying on loans to help pay for college.  In order to successfully manage this debt, it is important to understand the loan process, including how student loans work, the types of loans available, and applying for loans.  If you need additional money beyond savings, grants, and scholarships, consider accepting a student loan to pay the expenses associated with your education.

How do student loans work?

Loans allow students to borrow money to help pay for the costs associated with higher education.  Payment of such loans can typically be deferred until the student has graduated from school.  The U.S. Department of Education administers loans funded through the federal government.  Federal loans are made available either by providing money directly to colleges and universities or by connecting students with private loans.

Types of Loans

1.  Federal Stafford Loans:  Federal Stafford Loans are available to both undergraduate and graduate students and must be repaid.  First-year undergraduate students are eligible for up to a $2,625 loan. Second-year students can borrow up to $3,500 and up to $5,500 each following year.  The total amount borrowed by dependent students can exceed no more than $23,000. 

Graduate students can borrow more through Federal Stafford Loans, but the government can subsidize only $8,500 of this debt.  Eligible graduate students can borrow up to $18,500 each year, but can borrow no more than a total of $138,500 during both undergraduate and graduate study.

The interest rate on Federal Stafford Loans varies, but will not exceed 8.25-percent.  For qualifying students, the government will pay the interest while the student is in school.  These subsidized loans are offered based on financial need and can save a considerable amount of money in interest.  Students who do not qualify for subsidized loans will be expected to pay back the full amount of their loans plus accrued interest.   

2.  Federal PLUS Loans:  Federal PLUS loans are loans made to the parents of students.  To be eligible for a Federal PLUS Loan, students must be enrolled at least part-time at a participating college or university.  Federal PLUS loans are very similar to Stafford loans, except they are made directly to the parent instead of the student.  Parents may borrow up to the full amount of the student's total tuition.  Unlike Stafford loans, parents must begin to repay PLUS loans immediately. 

3.  Perkins Loans:  Federal Perkins Loans are funded by the government and made available through individual colleges and universities.  These loans are available to eligible undergraduate and graduate students who are enrolled full-time and meet all the requirements established by the individual college or university.  Consult a financial aid or admissions counselor at your university of choice to learn more about the institution's specific requirements.  Perkins loans are offered at a low interest rate of 5-percent.  Undergraduates can borrow a maximum amount of $4,000 per year, while graduate students can borrow up to $6,000 per year.  Repayment of Federal Perkins Loans begins nine months after graduation and students have up to 10 years to repay the amount borrowed. 

How do you apply for a loan?

Applying for loans through the United States government is accomplished by filling out a Free Application for Federal Student Aid (FAFSA).  Paper applications can be found at the counselor's office of your local school, but you can also fill out an online application at the FAFSA website.  Students will need to request a PIN number before filling out the application online.  For maximum financial aid benefits, complete an application sometime between January and March for the next school year.  Some financial aid programs require an early application in order to qualify.