Student Loans

Copyright 2025 Financial Aid Consulting. All rights reserved. No portion of this article may be reproduced mechanically, electronically, by photocopying, or by any other means without the author's permission. Howard can be reached at finaidguy@gmail.com

Student Loans (Federal are offered by the US Department of Education. Two types of federal student loans require an FAFSA and are available each October. The FAFSA requests prior years’ last filed income tax data for both the parent and student.

Stafford loans are not based on credit score, are offered to all students regardless of EFC, have varied and unique repayment plans, and can be forgiven based on specific criteria for high-demand professions, especially in low-income communities. Needy students can receive subsidized loans in which the US government pays interest while the student is in college, and unsubsidized loans in which interest accrues or accumulates and is paid by the borrower. Under certain circumstances, repayments can be deferred, postponed, or eligible for forbearance. Forbearance allows the borrower to temporarily stop making payments, make a smaller payment, or extend the repayment schedule. Another unique feature of the Stafford (Perkins loans) is the repayment options that are not available with alternative loans. Here is a list of the repayment options that can be explained in greater detail by visiting the Federal Student Aid and Department of Education websites.  Please check with the department regarding the current status of the repayment

• Standard Repayment Plan

• Graduated Repayment Plan

• Extended Repayment Plan

• *Income-Sensitive Payment Plan

• The beauty of Stafford loans is that they are easy to obtain and repay, giving students an ownership stake in their education.

• The downside is that the student can only borrow between $5500 and $7500 per year, which, in most cases, will not cover the total cost of college.

Colleges also award Perkins loans to needy students at only a 5% interest rate. The federal government subsidizes the interest on the loan while the student is in college.

Bottom Line: Always accept Stafford and Perkins loans before any others.

Parent PLUS Loan (7.6% and 4% Origination Fee)

The Parent PLUS loan is entirely the parents’ responsibility to repay. It has liberal credit terms and, unlike alternative loans, does not use the debt-to-income ratio. If a parent is denied a PLUS loan, the student can receive an additional $4000 in unsubsidized Stafford loans. Since it is in one parent’s name, the parent with the stronger credit score may be better positioned to borrow.

The PLUS loan functions similarly to a life insurance policy because it gets canceled if the parent or student passes away or if the parent becomes totally and permanently disabled. However, a downside of a PLUS loan is that the parent is entirely responsible for repayment, even if the student drops out.

Alternative Loans

These are all outside loans offered by banks, credit unions, employers, state agencies, etc. Since most students do not have an established credit score, co-signors with good credit can cosign for the student to protect the lender from a loan default. Usually, the co-signor is off the hook if the student makes timely payments for at least 2 to 3 years after graduation. Repayment terms are not as flexible and are not subject to loan forgiveness, deferment, and forbearance. Fixed-rate loans are the best option for those with marginal credit since variable rates can be much higher. The best thing is to check with the college about their programs, but shop around. Bankrate.com is an excellent site from which to begin.

Home Equity Loans or Lines of credit provide great flexibility and are subject to less interest, but they are getting harder to obtain as credit requirements have become more stringent.

Credit Card payments can also be expensive, but can be used for books and paying other expenses not paid directly to the college. Using a credit card makes sense for incidental costs that can be paid within each billing cycle rather than over many years.

Borrowing against a 401 (k) or other retirement plans should be used as a last resort. Parents also need some financial security for their future and can ill afford to sacrifice it to pay for a college education. Many years ago, I had a client who cleaned his retirement account to pay for his son’s education. After only one semester, the student dropped out. That was a costly mistake, especially when things are poorly thought out.

Paying for college will require various borrowing options, which both the student and parents should decide on. Before deciding on borrowing options, consider that college is a four-year expense for the student and their siblings.