Understanding Types of Educational Loans

With the rising cost of a college education, footing the bill is hard work. Many students like me can't quite come up with what they need. Thankfully, the U.S. Government has many programs set up through which people like you and me can receive financial aid. In Part One I explained how the FAFSA works and outlined the basic steps in completing the application. In Part Two I enumerated the three major types of grants available through the FAFSA. This final piece, Part Three, details the various major loans offered.

Loans differ from grants in that loans must eventually be repaid (usually with interest). Grants, remember, are free money with very few strings attached. Obviously, if you can fund your education through work and grant money, do it. Loans are typically the last option, but the loans offered by the government tend to be better than most.

Stafford Loans

The Stafford Loan is the most common student loan offered by the U.S. government. This lower-interest loan comes from either the government directly or from a private lender guaranteed by the government. Check with your academic institution to see whether it participates in the Federal Direct Loan program or the Federal Family Education Loan program-the former is a direct government loan and the latter comes from a private lender.

The Stafford Loan is available to both undergraduate and graduate students, and it comes in two varieties: subsidized and unsubsidized. Subsidized loans are the better option, if you can get them. As with grants, the subsidized loans tend to go to those from lower income backgrounds. The primary advantage of the subsidized loan is that the U.S. government basically pays your interest until 6 months after graduation. Not until then are you expected to begin paying. The unsubsidized loan, on the other hand, does accrue interest while you're in school. However, there is still no expectation to pay off the loan until you've graduated.

The interest rate on Stafford Loans varies, never going above 8.25 percent. Currently the interest rate is hovering around 7%. This interest rate is the same for both subsidized and unsubsidized loans.