Personal Finance: Choosing student loans

Posted: August 07, 2011

Students preparing to go to college this fall might be preoccupied with choosing a computer or shopping for sheets that fit a dormitory bed.

Often, less attention goes into selecting college student loans. The decision gets shunted aside or made in an instant because tuition is due, loans have confusing names, and the financial-aid office at your college might provide little guidance.

Consumer advocates - worried that students are coming out of college with overwhelming debt - have been pushing colleges to provide more help to students when it comes to making loan choices. Some colleges, such as Barnard and Mount Holyoke, have been praised by the Institute for College Access and Success for emphasizing the risks of private loans.

Even if your financial-aid office is not helpful, you can identify the best loans yourself.

Call your college financial-aid office director and ask whether you might qualify for any grants or scholarships that you have not yet requested. If you are from a modest-income family, ask about Pell Grants, which can provide up to $5,500 that does not have to be repaid. Then ask if you can tap state grants in your home state or the state where you are attending school. Call your state government's department of education.

Free money first

If you are too late for a grant this year, put next year's application date on your calendar.

After tapping as much free money as possible, choose student loans. Turn first to loans from the federal government rather than loans that come from a bank or nongovernment lender. Again, you should be directed to federal loan applications by your college financial-aid office. You can get additional information at

The paperwork from your financial-aid office will probably give you a choice between subsidized Stafford loans or unsubsidized Stafford loans. There is a huge difference between them. If you qualify, take the subsidized Stafford loans, which carry a $19,000 limit for four years of undergraduate studies. Subsidized means the government absorbs the interest and provides a low interest rate of 3.4 percent. That is for loans originated during the 2011-12 academic year.

That is a lot better than the 6.8 percent on the regular Stafford loan, which is unsubsidized. Also, because interest on an unsubsidized loan accumulates while you are in school, your balance on, for example, a $19,000 loan would be about 16 percent higher compared with a subsidized loan, said Mark Kantrowitz, publisher of FinAid. For 2012-13, the subsidized-loan rate increases to 6.8 percent.

Subsidized loans

Typically, if your family's income is no higher than $50,000, you will be in a good position to qualify for a subsidized loan. More than $100,000 makes it unlikely but not impossible. Factors such as having retired parents or multiple siblings in college at the same time will affect eligibility. Cost of the college also can matter, Kantrowitz said.

If you cannot get a subsidized loan, choose the regular Stafford loan. Also, ask your college financial-aid office if you can get a Perkins loan, a federal loan with a 5 percent interest rate, for students who have lower incomes than most students at a particular college. So if you come from a middle-income family, but attend a college that attracts affluent students, you might qualify for a Perkins loan at that college, even though you would not at a community college with many low-income students.

If you are like many students, you might find that the federal loans you are offered are not adequate to cover all your costs. In that case, your parents can borrow additional money using what are called PLUS loans. The interest rate is set at 7.9 percent.

Another choice: private loans. But beware. Although federal loans all have fixed rates, or interest rates that will never increase during the 10 years you pay them off, that is not the case with many private student loans.

Gail MarksJarvis is a personal-finance columnist for the Chicago Tribune. E-mail her at

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