Guide to federal student loan programs

Doing your homework can mean less debt after borrowing

If you’re investing in your future to get a college education, part of that funding is likely to include student loans. Of the 20 million students who attend college in the United States each year, nearly 60 percent borrow money to help cover the cost, according to the Chronicle of Higher Education.

While no one likes debt, there are smart ways to borrow.

The first step is to fill out the Free Application for Federal Student Aid. Make sure to meet your college and state deadlines. You may  be eligible for grants, which are free awards, or a work-study job, which will allow you to pay for some college bills as you go. The FAFSA is also the ticket to federal student and parent loans.

If you need to borrow money for school , turn to federal student loans first, says Mark Kantrowitz, publisher of Federal loans generally have lower interest rates than private loans, and much lower terms than credit cards. You don’t have to start repaying them until after you finish college, and there are  flexible repayment plans, such as income-based repayment plans, cancellations (forgiveness) for certain types of jobs or public service, and deferment options. You’ll only deal with one lender and may be able to consolidate all your loans for a better rate.

The U.S. Department of Education ( offers two federal student loan programs, the Perkins Loan and Direct Loan.

Perkins Loans are based on  financial need and the availability of funds at your college. Unlike Direct Loans, the lender will be your school. Undergraduates can borrow up to $5,500 and graduate students up to $8,000 annually. The interest rate is fixed at 5 percent.

Direct Subsidized Loans are for students enrolled at least half time  who demonstrate financial need. Students may borrow between $3,500 and $5,500 a year. The U.S. Department of Education is the lender and the borrower isn’t charged interest  while in school. Until  June 30, 2013, the interest rate is 3.4 percent, but that will double on July 1 unless Congress extends the lower rate, which it did in 2012.

With Direct Unsubsidized Loans, undergraduate and graduate students may borrow $5,500 to $20,500 a year, minus any subsidized loan amount received for the same period. Students  are responsible for interest starting from the loan’s origination date. The rate is 6.8 percent.

Direct Plus Loans for Parents allow them to borrow up to the cost of college attendance, minus other financial student aid awards, for their dependent students. The interest rate is 7.9 percent and parents are responsible for interest during all periods of the loan. You can choose from several repayment plans and switch plans if needs change. To prevent getting in over their heads, parents are cautioned to keep their income and other debts in mind when borrowing.

With Direct Plus Loans for Graduate or Professional Students, the maximum amount that can be borrowed is the cost of attendance, minus other financial aid, such as unsubsidized loans. Students  must have a good credit history and they pay interest (7.9 percent) from the start of the loan.

Never borrow more money than you need, Kantrowitz said. “Every dollar you borrow will cost you about two dollars by the time you’ve repaid your debt. Live like a student in college so you don’t have to live like one later, and defer your dreams.”

Before you borrow, take into account  your expected annual salary after graduation. Ideally, you should borrow less than half your expected starting salary , Kantrowitz said.

One way to decrease debt is to pay the interest  on unsubsidized loans while you are in school and during grace periods. That way the loan isn’t growing by compounded interest.

It’s also important to stay organized. Keep track of how much you borrow and keep all loan documents in one file.

College students who graduate this spring can take advantage of two new tools on the U.S. Department of Education's website (

A loan counseling page and a repayment estimator to help students compare monthly payments across seven repayment plans are designed to help students better understand and manage their student loan obligations.