How College Financial Aid Works

Student Loans

College student in financial aid office.
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Federal student loans are the easiest way to college students to borrow the funds they need for school.

Federal loans are the most accessible and affordable loan resources for students. There are two federal programs available nationally: the Stafford and Perkins programs. Both provide low-interest, payment-deferred loans that borrowers can repay after their enrollment ends.

Interest -- capped at 6.8 percent for Stafford loans and 5 percent for Perkins loans through 2013 -- is subsidized by the government to keep rates low and only begins to accrue after the borrower begins repaying the loan. To qualify for interest-subsidized Stafford or Perkins student loans, the student must demonstrate need by completing the FAFSA. Although several different repayment plans are available, most students repay these funds over a 10-year period.

Undergraduates may borrow as much as $5,500 in Perkins funds each year with a total amount not exceeding $27,500 [source: Federal Student Aid]. Stafford borrowers may borrow $5,500 in the first year, $6,500 in the second year and $7,500 in the third and fourth years [source: Federal Student Aid]. Independent undergraduate students qualify for even higher loan amounts. Additional Stafford and Perkins loans, with higher annual borrowing limits, are available to graduate and professional students.

Perkins loans include both federal and institutional funds and reside on campus. If you're offered a Perkins loan, you need only to sign the promissory note.

Stafford loans are slightly more complicated. You must choose the lender who will carry your loan, usually a bank or credit union. If your school participates in the Direct Loan program (more than 2,200 schools now do), funds will come directly from the Federal government [source: Caplinger].

Students who are unable to demonstrate need through the FAFSA may still borrow from the Stafford student loan program. These funds are unsubsidized, meaning they carry higher interest rates and must be repaid starting at the time of receipt.

In addition to federal loans, student should research private loans, which can sometimes offer competitive terms. As with local scholarships, check with fraternal organizations and churches or synagogues. Finally, an increasing number of colleges and universities are offering institutional loans at very reasonable rates.

Regardless of whom you borrow from, take this message to heart: Pay on time and you can save money. If you have problems, don't default. Contact your lender, who can offer you a variety of repayment options.

Student loans don't have to be a burden on the student alone. For more on parental student loans, read on.