Federal College Loans Explained

Federal college loans tend to confuse many potential college students. Most people do not really understand the different types of loans available to them, or how they work. They simply take the word of their school that they are being offered the loans for which they qualify.

First, understand that there are actually three different types of federal financial aid. Grants are money that are given by the government and do not require repayment. The Perkins Loan Program and the Federal Family Education Loan Program are loans that do require repayment. Some federal college loans are subsidized and others are not, but all of them allow you to wait until after college to start making payments. The most important thing to remember is that the federal government doesn’t actually loan money.

Subsidized federal college loans are loans that you do not pay interest on until you graduate college. The government pays the interest on these loans instead. Unsubsidized loans accrue interest while you're attending school, even though no payment is necessary.

Applying for federal college loans is rather simple. Subsidized loans typically do not require a credit check, because they are based on need rather than creditworthiness. All financial aid will require that you submit a Free Application for Federal Student Aid, or FAFSA, which you can now file online fairly easily.

Subsidized Loans

The Perkins Loan is borrowed directly from your school. Funds are given to the school by the government for this purpose. The loan is given based on severe financial need, as well as the availability of funds. You can only borrow up to $4,000 per year in this type of loan.

Subsidized Federal Stafford Loans are borrowed from a private lender. These loans are higher, and the caps are varied based on where you are in your education. Again, the interest is paid by the federal government as long as you are in school, and in some cases beyond.

Unsubsidized Loans

Unsubsidized Stafford Loans are borrowed from a private lender. They are not based on financial need, but a credit check is rarely required. However, there are caps on how much you can borrow per year, based on where you are in your education.

The PLUS loan is an unsubsidized loan that may be taken by parents to help pay for their dependent child’s college education. These type of federal college loans are not capped, but do require that the borrower has good credit.