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What are College Loans?

what are college loans

Anyone planning on attending college should first become educated about student loans. Since most American families can't afford the full cost of college, student loans are available to help delay the cost until the student begins earning a living. There are two main types of student loans: federal and non-federal, also known as private loans.

Determining Eligibility for Student Loans

Prospective students interested in obtaining student loans will have to fill out the Free Application for Federal Student Aid (FAFSA) to determine eligibility. While scholarships are doled out based on academic and athletic merit, student loans are offered according to a family's financial need. Students with significant savings in their own name will be penalized when student loan eligibility calculations are made. The federal government recognizes the burden placed on families who have multiple children attending college at the same time. Prospective college students who already have a sibling in college will likely be eligible for more loans than those without.

Federal Student Loans

Federal student loans come in the form of Stafford loans and Perkins loans. All federal student loans are unsecured college loans. Pell grants are also available from the federal government. Federal student loans are the most desirable of the two loan varieties as they are almost always offered at a reduced interest rate. Many are subsidized as

well. Subsidized student loans do not accumulate interest while the student is in school or during the six months after graduation.

The other reason why federal student loans are so appealing is that they are eligible for the federal government's recent Income Based Repayment (IBR) initiative. This program allows low income college graduates to forgo payments on the federal student loans until their income breaks a specific threshold. It also permits reduced payments based on a graduate's earnings. If a graduate eligible for the IBR program is still indebted on his original federal loans after 25 years of participation in the program, those loans will be canceled out.

Non-federal loans, commonly referred to as private loans, are also available for college students. Private loans are issued by banks and other major lending institutions. These are less desirable as they typically have a higher interest rate and they are not eligible for the IBR program. It is also more difficult to qualify for private student loans as lenders typically require the applicant to have an excellent credit rating. Some examples of non-federal student loans include those issued by large banks like Bank of America and Sallie Mae's Parent PLUS loans. Another consideration? Although all federal student loans are all unsecured college loans, a private loan may not be if you don't have good credit.

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