July 21, 2014

Best Student Loans: Stafford vs Perkins vs Plus

Compare Stafford Loan vs Perkins Loan vs Parent PLUS Loan vs Private Loan
Read more about Student Loans

What to do after high school is one of the biggest decisions a student has to make. Many factors go into deciding which school to attend and which major to pursue. While those choices can reverberate for many years, an equally weighty decision involves how you're going to pay for all of it.

After all, not many students have tens of thousands of dollars lying around. About 60 percent of Americans take on loans to cover the cost of college attendance each year, according to the Chronicle of Higher Education. As a result, about 37 million people owe a total of $900 billion in student loans at the moment, according to the Federal Reserve Board of New York.

That astronomical number should inspire prospective college students and their parents to pay careful attention to how they’ll pay for school and which loans they take out. It’s a tough call as many factors will come into play over which loans you can get, and there are several types of loans out there.

So which type of student loan is likely to bury you in debt for years to come? Consider your options below.

Study Methodology

CreditDonkey.com looked at four factors when comparing the different student loan types:

  1. Interest Rates/Fees
  2. Accessibility
  3. Funding
  4. Repayment

Choosing a loan with reasonable interest rates may be the most important factor when you decide which route to go. High fees will also mean you do not get as much money in hand as you will pay back later. Fees are calculated as a percentage of the total loan, meaning you borrow x amount of dollars that you will pay back but only receive that number minus the fee amount to use for college expenses.

Of course, you have to actually be able to access the loan money for the interest rates to matter. Some loans are designed to favor students who have a much larger financial need than others, while other accessibility factors may also come into play like the borrower’s credit rating and overall loan pool.

Another matter worth noting: Depending on where you attend school, you may need more or less money. Each type of loan varies as to how much you can borrow per year of attendance.

Even though you are just starting to make the leap into college, you also want to have a good idea of what your repayment situation will look like once you are done. Sure, it puts a damper on the whole collegiate experience, but forgetting to take this factor into account will be much more of a downer once the greatest four or so years of your life are over. Some loans allow for a grace period before you have to start paying the lender back to allow you time to get on your feet and land a job, while other loans do not.

It is important to note that you should start researching financial aid programs one to two years before you plan to start college and fill out a Free Application for Student Aid (FAFSA) around January 1 of your senior year. This will increase your chances of receiving aid from sources that may have limited funds while also getting feedback on which loans you are eligible for.

The Go-To Loan: Federal Stafford Loans

(subsidized and unsubsidized)

  • Interest rates/fees: 4.66% interest rate (6.21% interest for graduate students) / 1.073% fees, 5/5
  • Accessibility: Subsidized loan accessibility based on financial need / Unsubsidized loans available to almost all undergraduates, 5/5
  • Funding: $23,000 (subsidized) / $31,000 (unsubsidized) total for undergraduate students; $65,500 (subsidized) / $138,500 (unsubsidized) total for graduate students; the graduate number includes the loans used for undergraduate studies as well, 4/5
  • Repayment: Six-month grace period, 4/5
  • CreditDonkey Score: 4.5/5

Why we like it: If you are eligible to receive subsidized loans, take them without thinking twice. The federal government will pay the interest on, or subsidize, your loan while you are in school. Having anyone, especially the government, pick up your tab for any period of time is always a plus.

Even if you do not qualify for the subsidized loan, the interest rates are among the best you will find, so an unsubsidized Stafford loan, for which you’ll feel more of the interest burden, is a great choice as well.

Downsides: If you are attending an out-of-state college out or a generally expensive institution, the limits on funding may force you to look elsewhere to make up the difference between this loan and the total cost of tuition.

Who it’s best for: Stafford loans are a great option for all students in need of borrowing money, no matter their financial need. Those who do have a financial need may qualify for the subsidized version of the loan, which is the best loan you can find. Some parents and students may incorrectly believe they cannot qualify for federal loans due to having an above-average financial position. However, they could still fill out the FAFSA and take out an unsubsidized Stafford loan, assuming they do not have grants, scholarships or other money to cover the cost of college. If this loan does not cover the total cost of tuition, you may want to look into a more affordable school or consider the other loan options below to supplement the Stafford loan.

Most Flexible Funding: Parent PLUS

  • Interest rates/fees: 7.21% interest / 4.292% fee, 3/5
  • Accessibility: Accessible to those with good credit; loans are taken out by parents, 4/5
  • Funding: Difference between cost of attendance and other aid, 5/5
  • Repayment: Repayment begins 60 days after disbursement; deferment can be requested until after student leaves college, 3/5
  • CreditDonkey Score: 3.75/5

Why we like it: It’s a federal loan that makes up the difference between all of your other aid and the total cost of attendance. This means that if you take out a Stafford or Perkins loan and still come up short, the Parent PLUS loan can bridge the gap for you to be able to attend the school of your choice.

Downsides: Being able to bridge the gap does not come without cost, though. The interest rate is a good bit higher than both the Perkins and Stafford loans, and the Parent PLUS loan also comes with a pretty high loan fee.

These loans also require a credit check and are unavailable to those who are 90 days late on any payments, have filed for bankruptcy or have bad credit.

Who it’s best for: The Parent PLUS loan is different from many other student loans because it is the parent who will be taking out and paying for the loan, as opposed to the student. This can be seen as a positive sign in some situations, and many parents may want to take on the burden of paying for college rather than leaving it completely up to their children, but it may not necessarily be the best choice. This debt has a much shorter repayment time horizon and could jeopardize your retirement goals.

Great…If You Can Find Them: Perkins Loans

  • Interest rates/fees: 5% interest / no fees, 5/5
  • Accessibility: Not all schools participate; limited funds on a first come, first serve basis, 3/5
  • Funding: $5,500/year, for a total of $27,500 for undergraduate students; $8,000/year, for a total of $60,000 for graduate students, 4/5
  • Repayment: Grace period of nine months after graduation, 5/5
  • CreditDonkey Score: 4.25/5

Why we like it: The Perkins loan has a very competitive interest rate, no loan fees, more money per student than Stafford loans, and a longer grace period than other loans. No interest is charged while you are in school, and the 5% rate kicks in nine months after the end of college. If you qualify for a Perkins loan and are offered one, this may be the best bet out there.

Downsides: That’s the catch – these loans are in short supply. The Perkins loans are targeted to low-income students to help them attend college. Only certain colleges offer Perkins loans, and each one that does determines how much of the loan you actually are entitled to receive.

Who it’s best for: Anyone who qualifies. If you meet the criteria of “exceptional need,” it is a good idea to do some research on which schools offer Perkins loans, and how much funding is available for these loans. If you have the means to apply to several colleges that fall under this category, it will be well worth the effort if you land a Perkins loan. You need to apply early and often. If you wait too long, the funding for a Perkins loan at your institution of choice may have dried up.

The Last Resort: Private Loans

  • Interest rates/fees: Variable interest rates from 3% to 12%; origination fees; and other charges, 2/5
  • Accessibility: Wide array of options; may be overwhelming; also may depend on credit/cosigner, 3/5
  • Funding: You will get the funding you need with the right credit and/or a cosigner, but at a likely high or unpredictable cost, 4/5
  • Repayment: With private lenders, there will be no leniency on repayment, so choose your degree and career path wisely, 2/5
  • CreditDonkey Score: 2.75/5

Why we like it: If you have no other options, at least you will still be able to attend college by finding a private loan.

Downsides: The negatives could outweigh any and all positives if you take on a private student loan. Chances are private loans will be variable rather than the set rate you get with federal loans. There will most likely be no set repayment protection or grace period. Another thing to consider: Federal loans offer free insurance, which cancels the debt if the borrower dies or becomes disabled. Don’t expect private lenders to be so forgiving.

Who it’s best for: Students and parents with no other options. Seriously. Forbes says, “They should be called ‘No Alternative Loans’ because they should be your last resort.” If you do choose this option, Forbes recommends using SimpleTuition to search for the best deals.

Other Options

No-interest charity loans: U.S. News details a list of charities that offer no-interest loans. Taking out a loan without interest could save a ton of money in the long term, but it is a very intensive process, including interviews and essays to receive one of these loans. And some require repayment immediately through small monthly payments. They also do not qualify for “public service forgiveness,” an option with federal loans that allows some or all of the remainder of your student debt to be forgiven after 10 years if you pursue a career of public service.

Retirement Plans/Roth IRAs/401(k): One option, albeit not necessarily a recommended course of action, is to use money from a retirement account to pay for education expenses.

Roth IRAs can be used not only for retirement income but also for education expenses. Withdrawals from IRAs, including Roth IRAs, for qualified education expenses are exempt from withdrawal penalties. All contributions to Roth IRAs can be withdrawn tax- and penalty-free.

Most 401(k) plans allow investors to take out a loan from their accounts but limit how much they can take out. One major sticking point is that the loan must be repaid within five years through payroll deductions. The interest rate you will be paying is usually set by the plan. If you do not pay the loan back within the five-year period, you will be hit with a 10% penalty.

Handicapping your retirement in exchange for paying for your child’s education is not the best solution. Keep in mind you can always borrow money to pay for school, but you cannot borrow money to pay for your retirement.

Mortgage/Home Equity Loans: Because parents have a large chunk of their net worth tied into their homes, taking out a new mortgage is seen as a common solution to paying for college. This may involve cash-out refinancing, which requires taking out a new mortgage on the home for a greater amount than the existing mortgage. The lender pays off the existing mortgage and lends the remainder to the homeowner. You can also re-mortgage your home to stretch your current payments over a longer time period and reduce the payments you make. Another option is a home equity line of credit, which you can draw on any time you want and make payments according to the credit used. Remember, these loans use your home as collateral, which means the lender can foreclose on the loan if you can’t make payments.

Family Loans: If you have family members who have the means to lend you money for college, this is an option that will probably come with lower interest rates than any other option on this list, and perhaps no paperwork. Of course, you need to have access to this family member in the first place and make sure they are willing to lend you a large sum of money. You also have to consider the potentially negative consequences of borrowing from a family member if any wrenches are thrown into the repayment plan.

More from CreditDonkey:

What to Buy (and Not Buy) for College

Infographic: College Expenses

How to Pay for College

Infographic: College Expenses

College: The Best (and Most Expensive) Years

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