Understanding Your U.S. Federal Financial Aid Options: Perkins and Stafford

by Staff Writers

If you're excited about starting school soon but still can't figure out a way to meet all of your tuition costs and fees for books, housing and food, you may want to consider a federal loan. Federal loans are given to students and families who can demonstrate financial need and are generally easier to acquire than traditional loans from a bank because of more flexible payment options and lower interest rates. They can be a great way to pay for a complete program or offset the price of tuition after scholarships, grants and other financial aid. To learn about two types of federal student loans, the Perkins and Stafford loans, read below.

The Perkins loan is a loan for college and university students and the undergraduate or graduate level. The loan involves contributions from both the federal government and the student's school, but you may still need to supplement this loan with other scholarships and tuition assistance. Currently, 1,800 postsecondary schools participate in the Perkins loan program, so if you are considering applying for this aid, you will want to verify that the school you're applying to is one of the participating schools. While federal government funds make up most of the loan you receive, your school must also make a contribution. Your school is also responsible for determining the amount of your total loan. Generally, though, students can borrow up to $4,000 for every year you are an undergraduate student, with a maximum total amount of $20,000. Graduate and professional students can earn up to $6,000 per year, with a cap of $40,000. That $40,000 also includes any money you received from Perkins loans when you were an undergraduate student.

As long as you have been at least a part-time status, you will not have to start repaying your loan until nine months after graduation. Perkins loans can also be canceled, though there are some stipulations that may vary by school.

The Stafford loan features lower interest rates and offers students the choice of paying interest while they're in school or deferring payment until after they've graduated. To apply for a Stafford loan, you must be a U.S. citizen or U.S. permanent resident and plan to be at least a part-time student. If you have received any other loans or grants to fund your education, you must also be in good standing with those organizations. All applicants must also fill out and submit a FAFSA form, which stands for Free Application for Federal Student Aid, and on it, you will determine your dependency status. This form must be completed and turned in before the deadline. If you choose to have a subsidized Stafford loan, you and your family must be determined by your school to have financial need.

There are two types of Stafford loans: the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDSLP). The FFELP loans are actually issued by private organizations or lenders, like banks, but are guaranteed by the federal government. The FDSLP loans are actually granted to the student directly from the U.S. government. Whether you have an FFELP or FDSLP loan, you can choose to have your Stafford loan subsidized or unsubsidized. The interest on subsidized loans are paid by the federal government while you're still in school, and you don't have to pay it back. Students and their parents must demonstrate real financial need to have this type of Stafford loan. Unsubsidized loans mean that students have to pay all of the interest on their loan, but they do not have to start payments until six months after graduation. If the student drops below part-time student status, he or she has three months to begin payments on the loan. As of the 2008-2009 school year, subsidized interest rates for the Stafford loan were 6.00%. Unsubsidized/graduate rates were 6.80%. The unsubsidized rate is projected to stay the same until at least 2013.

Before applying for a Stafford loan, understand that you may not be able to pay your entire tuition with the loan, especially if you plan to attend a private university or an out-of-state public university, where tuition costs may be much higher. As of the 2008-2009 school year, dependent students can earn $5,500 their first year, $6,500 their second year, and $7,500 for their third year and any years after that until graduation. Independent students can receive significantly more, especially if they are in graduate or professional school.