Federal student loans: How to get one

For most families, money plays a big part in the decision on where to go to college. At some point, most of them will get some help from Uncle Sam to pay the bill.

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In its most recent study of student financial aid, the National Center for Education Statistics reported that a full three of four full-time undergraduate students got some kind of financial aid. About half of all full-time undergraduate students took out a federally guaranteed student loan, and just fewer than 10 percent of parents of dependent, full-time students took out federal Parent Loans for Undergraduate Students, commonly known as PLUS loans.

With some notable exceptions, federally guaranteed loans are easy to get and the interest rates and terms for repayment are very attractive, especially for families who make too much money to qualify for need-based grants and scholarships, and don't want to divert funds that are in other high-yielding investments.

So what's available and how do you qualify?

Student loans
For students, the most common form of federal loan assistance is what's known as a Stafford loan; they fall into two categories -- subsidized and unsubsidized. Dependent freshmen can borrow up to $2,625; sophomores can borrow $3,500; and third and fourth-year undergraduates can borrow up to $5,500. If their parents have been turned down for a PLUS loan or if they are independent, they automatically qualify for an additional $4,000 per year their first two years and an extra $5,000 the final two years. You have 10 years to pay back the loan; if you have more than one loan, you can consolidate them and get up to 25 years for repayment, says Texas-based certified college planning specialist, Alisa LeSueur.

Subsidized Stafford loans are given to students who meet specific financial need guidelines; for those loans, the federal government pays the interest that accrues while the student is in school. The first payment isn't due until six months after graduation. The interest rate is variable and resets every year on July 1; it's capped at 8.25 percent.
Unsubsidized Stafford loans are available regardless of financial need; any student can get them. The difference from the subsidized loan is the interest adds up while the student is in school. You can make interest-only payments during school, or defer it until after graduation and roll it into the loan amount.

There's a 4 percent loan origination fee for the Stafford loan, but that's typically just deducted from the loan proceeds, LeSueur says.

The other student loan available from the feds is the Perkins loan. It has the best terms, but is limited to students with exceptional financial need. Plus, it may be going away, says Robert Helgeson, director of student financial assistance at Gustavus Adolphus College in St. Peter, Minn., and president-elect of the Minnesota Association of Financial Aid Administrators.