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Choosing the Right Student Loan

Once students and their parents have determined that student loans are necessary to obtain a college education, there are several confusing choices. 

Q: What is the difference between a subsidized loan and an unsubsidized loan? 
A: 
A subsidized loan is a need-based federal loan for which the government (rather than the borrower) pays the interest while the student is in school, for any post graduate deferment periods, and six to nine months thereafter. Interest and principal must then be repaid over 10 to 30 years, depending on the type of loan, amount owed, and the repayment plan selected. Qualification is based on financial need, using the Free Application for Federal Student Aid (FAFSA) form. 

A student who does not qualify for a subsidized loan, or a student who qualifies for only a portion of the annual loan limit for a subsidized loan, can apply for an unsubsidized loan. An unsubsidized loan is a non-need based loan that cannot exceed the educational cost of school attendance minus other financial aid. Interest on an unsubsidized loan must be paid while the student is in school at least half time. If the student chooses not to pay the interest, it will accrue and be capitalized (added on to the principal at the time of repayment). The student must begin repaying the principal of an unsubsidized loan six months after graduation, upon withdrawal from school, or if the student is enrolled less than half time. Repayment can extend up to 30 years in certain circumstances, but is usually based upon a ten-year repayment plan.

The federal government provides funding for college students through Perkins or Stafford loans. All Perkins loans are subsidized, but Stafford loans may be subsidized or unsubsidized. Loan amounts for either a Stafford or a Perkins loan can vary and depend on the individual student’s need for financial assistance.

Q: What is a Perkins loan? 
A: 
A Perkins loan is a guaranteed federal loan of up to $5,500 per year with a lifetime maximum loan of $27,500, and $8,000 per year with a lifetime limit of $60,000 for graduate studies. The amount received is based on exceptional financial need and availability of other aid, with repayment deferred up to 10 years. If the recipient defaults on the loan (fails to repay it within the time allowed), then he or she will not be able to get any other federal funding in the future. There are no origination or guarantee fees with a Perkins loan.

Q: What are Stafford loans? 
A: 
Stafford loans can be either subsidized or unsubsidized. Loan recipients can take from 10 to 30 years to repay, depending on the amount owed and the repayment plan selected. Presently, Stafford loans carry a lower interest rate than Perkins loans. As is true with a Perkins loan, the recipient who defaults will not be eligible for future federal funding. Stafford loans allow dependent undergraduates to borrow up to $5,500 their freshman year, $6,500 their sophomore year, and $7,500 for each remaining year.

Q: What are the advantages and disadvantages of taking out a Perkins loan as opposed to a Stafford loan?
A: 
Stafford loans have a wider variety of repayment plans to choose from and a longer repayment period (up to 30 years in certain circumstances) than Perkins loans, which must be paid within 10 years of the loan. Perkins loans, however, have a higher fixed interest rate than Stafford loans and contain fewer fees.

Q: What is a FFEL Plus loan? 
A: 
A Federal Family Education Loan (FFEL) Plus allows parents to borrow for the educational expenses of their dependent student. In order to qualify, the parent must have a good credit history since the parent, not the student, will be required to repay the loan. These loans are unsubsidized, often carry a higher interest rate, and are equal to the student’s cost of attendance minus any other financial aid the student receives.  
 
Q: How do I apply for the appropriate student loan for my circumstances?
A: 
You must file the FAFSA or Renewal FAFSA form to be considered for a federal subsidized or unsubsidized loan. It is also important to remember that student financial aid is a highly individualized process. A review of your options with the school’s financial aid office will provide you with the best insight about loan types and amounts. 

1/3/2014

Law You Can Use is a weekly consumer legal information column provided by the Ohio State Bar Association. This article was prepared by attorney Terry D. Zimmerman, a partner in the Akron firm of Kaffen & Zimmerman; and Neil Sander and Mark J. Sheriff, attorneys with the Columbus firm of Wiles, Boyle, Burkholder & Bringardner Co., L.P.A. It was updated by Terry D. Zimmerman and Crystal M. Blevins, an attorney with the Cleveland firm of Keith D. Weiner & Associates.​​​

Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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