How Student Loans Work

Types of Federal Student Loans

Some types of teaching positions can get your student loans forgiven, if you qualify. Not a bad deal.
Some types of teaching positions can get your student loans forgiven, if you qualify. Not a bad deal.

There are three broad types of student loans a person can get from the U.S. government: Perkins, Stafford and PLUS.

The Perkins loan is a federal loan where the college the student is attending is the lender. The college gets the money for the loan from a pool established and funded by the U.S. government. Because of the size of the pool, competition for Perkins loans is intense, and qualifications are based on need. Students with the greatest financial need are the likeliest to receive a Perkins loan.

Perkins loans are unique in that they have more favorable terms for the borrower, like a nine month (as opposed to six) deferment period for repayment. What's more, Perkins loan recipients can also have their loan entirely cancelled in exchange for entering the public service sector, like the military, civil service or some teaching jobs for a set amount of time following college.

Stafford loans are the most commonly-issued type of federal student loan. These loans are so common, in fact, they're the ones that the widely published borrowing limits are centered around. How much to allow a student to borrow for a Perkins loan, for example, is largely left up to the university's financial aid office. Stafford loans, on the other hand, are strictly regulated by federal rules. Rather than being based on financial need or credit score, these loans are generally available to any student. These loans have low interest rates; the rate on a typical new Stafford loan is fixed at 6.8 percent [source: Department of Education]. Depending on which program your school takes part, Stafford loans will either be disbursed directly or under the FFEL program.

Parent PLUS loans are federal student loans borrowed by a student's parents. Out of all the types of federal loans, these most resemble a traditional commercial loan. Whether parents are eligible for a PLUS loan is based on their credit score, and interest rates are higher than Stafford or Perkins loans, fixed between 7.9 and 8.5 percent [source: Department of Education]. The cost of attendance at the university the student will be enrolled sets the limit for what a parent can borrow. There is also a PLUS loan program for graduate students as well.

If you've exhausted your limit for federal student loans and still find yourself short on money for tuition, it's time to look to the private sector for help. Read the next page for information on private student loans.