A primer on student loans -- Page 2

Below is a mini-tutorial on some of the different types of student loans. There are gobs of others, but these are the most common.

Perkins loan -- This loan is administered directly by individual colleges and universities, using funds allocated by the federal government. Loan repayments are made directly to the school.

Students must demonstrate financial need to qualify, and a credit history is unnecessary. These loans are subsidized, meaning no interest accrues until nine months after a student leaves school. Unlike Stafford or PLUS loans (described below), they have an attractive fixed rate of 5 percent. Loan amounts cannot exceed $4,000 a year, or $20,000 cumulatively for undergraduate degrees. However, due to a dearth of funding, it's rare for a student to get the maximum amount.

Because of their low rates, it's not a good idea to include Perkins loans among those you consolidate. Plus, Perkins loans may be eligible for loan forgiveness. That means students who enter certain public-service professions, such as teaching, law enforcement or health care, may never have to repay their loans.

Stafford loan -- This is the most popular federal student loan, and it comes in two flavors: subsidized and unsubsidized.

Subsidized loans are doled out on the basis of financial need, and no interest charges accrue until a student begins repayment, six months after leaving school.

Interest on unsubsidized loans begins accruing immediately. Students can elect to make interest payments while in school or add the interest charges to the principal balance of their loans. You don't have to demonstrate financial need for unsubsidized loans, though there are limits to the amounts you can get.

To be eligible for Stafford loans, you must attend school on at least a half-time basis. You don't have to submit to a credit check. Dependent students can accumulate a total debt amount of $23,000 for undergraduate degrees. Independent students, including students whose parents don't qualify for PLUS loans, can amass Stafford loan debt of up to twice that amount.

With both types of Stafford loans, the interest rate is capped at 8.25 percent. Origination and guarantee fees of up to 4 percent total may apply. Meanwhile, fees for alternative private loans can range up to 10 percent.

Stafford loans can come directly from the government (through the Federal Direct Loan Program) or from lenders participating in the Federal Family Education Loan, or FFEL, program. The school you attend determines the program. If the school offers Stafford loans through the direct program, you have to accept whatever terms and fees come with it. You have more latitude to compare rates from different lenders if your school participates in the FFEL program. Some participating lenders waive part or all of the fees, and some even offer rebates, discounts and other incentives, so it really pays to comparison shop.

Under certain conditions, part of a Stafford loan may be forgiven for students who commit to working in certain public-service professions.

Parent Loans for Undergraduate Students (PLUS) -- The federal government also offers a loan program for parents who are willing to incur debt for their children. These are not need-based, but credit-based, loans, and rates are generally higher (see table on previous page), though they are capped at 9 percent.

Parents with marred credit reports may have trouble getting a PLUS loan. In this case, students can qualify for higher Stafford loan amounts. But the credit approval process for PLUS loans is less rigorous than for other types of loans.

Parents who do get approved for a PLUS loan can borrow the amount needed to pay for all education costs, less the amount of financial aid received by their child. Like Stafford loan rates, they are subject to change every July 1. Payments on PLUS loans begin within 60 days of the loan's disbursement for the academic year.

State loans -- Though state education funding sources have been drying up in recent years, it wouldn't hurt to check if your state offers a loan program. Some offer low-interest loans, while others give rebates or discounts on federal loans. For more information, check out your state's higher education agency Web site, or go to www.studentaid.ed.gov and from there click on the "funding" tab and look for state aid.

Private loans -- After you've exhausted the federal loan possibilities, and there are lots and lots of them, you still have other more conventional loan options through banks and credit unions. While the loan may be in the student's name, usually a co-signer is necessary to get funding from private sources. This may be an option for parents who really don't want to go the PLUS route, but want to help out their children and believe them to be good credit risks. Of course, ultimately, the co-signer is on the hook for paying back these funds.

Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning.

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