Education Planning - Types of Financial Aid and College Loans

I. Types of Financial Aid

  • Grants and scholarships - Grants do not have to be paid back and are awarded by federal and state governments and individual institutions. Scholarships are usually based on merit.
    • Pell Grant - A federal grant that provides up to $2,340 a year. Awarded to the neediest students.
    • Supplemental Educational Opportunity Grant - A federal grant program for low-income students. The government distributes funds to individual schools, which are responsible for awarding grants of up to $4,000 per year.
  • Work - Helps pay for books, supplies and personal expenses. Includes Work-Study, a federal program providing part-time employment on campus or in surrounding communities.
  • Loans - Most financial aid comes in the form of loans that must be repaid. Includes both government-sponsored loans and private loans for students and parents.

II. College Loans
There are a variety of loan programs to assist families with covering higher education expenses. Some are need-based, others are not. Need-based loans usually have better terms and should be considered first.
  • Federal student loans - There are three main types of federal student loans:
    • Perkins Loans - Need-based loans awarded to students with the highest need. Features very low interest rate. Student not required to make any loan payments while in school.
    • Subsidized Stafford Loans - Need-based loans, also with very low interest rates. The federal government pays the interest on the loan while child is in school and during six-month grace period following graduation.
    • Unsubsidized Stafford Loans - Not based on financial need. Student is responsible for paying interest on the loan that accrues during in-school period. Student may pay interest while in school or have the interest added to the principal upon graduation.
  • Other student loan options
    • Private student loans - Many lenders offer private education loans to students. These loans are not subsidized and usually carry a higher interest rate than federal need-based loans.
    • College-sponsored loans - Some colleges operate their own loan funds. Interest rates may be lower than federal student loans.
  • Parent loans
    • Federal PLUS Loan - Largest source of parent loans. Parents can borrow up to the full cost of attendance, minus any aid received. Repayment starts 60 days after funds are sent to the school.
    • Private parent loans - Many lenders offer private education loans to parents. They usually come with a higher interest rate than the PLUS Loan.
Consolidation loan - A loan that combines several student loans into one, larger loan from a single lender. The interest rate may be lower than on the underlying loans. The total monthly payment may be lowered by extending the term of the loan. A term extension, however, will increase the total interest paid.
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