A range of student loans are available for those studying for an undergraduate or graduate degree. Such loans may be funded or backed federally while others are financed privately. The interest rate on a student loan will often depend on how it is funded as well as what type of student the loan is intended for.
Perkins Loans
Perkins Loans are federal loans designed for students who come from financially needy families. The financial need of the student is assessed using the Free Application for Federal Aid (FAFSA). The maximum amount available is $4,000 for those undertaking a first degree, such as a bachelor's or associate's, and $6,000 for those enrolled in a graduate programs, such as a master's or doctorate. The annual interest rate of Perkins Loans is 5 percent. Students who take advantage of Perkins Loans may have some or all of their loans canceled if they enter the public sector or enter the military.
Stafford Loans
Like Perkins Loans, Stafford Loans are guaranteed by the federal government. Unlike Perkins Loans, they are not limited to those from low-income families. There are two types: Federal Family Education Loan Program (FFELP) loans, which are provided by banks and federally guaranteed; and Federal Direct Student Loan Program (FDSLP), which are provided directly to the student from the U.S. government. Furthermore, Stafford Loans may be subsidized or unsubsidized. For the 2011-2012 academic year, subsidized Stafford loans had an interest rate of 3.4 percent, while unsubsidized loans have an interest rate of 6.8 percent. The total amount available for borrowing varies depending on whether the student is a freshman, sophomore, junior or senior.
PLUS Loans
If the maximum amount of Stafford Loans is exhausted, a student may take advantage of a PLUS loan, which is also guaranteed by the government. PLUS loans assess the creditworthiness of the student's family or, in the case of graduate students, the borrowers themselves. The credit check only seeks out borrowers who have an adverse credit history. The interest rate of PLUS loans are variable and will fluctuate each year, however they are capped at 7.9 percent.
Private Loans
Private student loans tend to originate from banks or other loan-lending institutions. They are not federally guaranteed in case of default, and therefore the interest rates on such loans tend to be considerably higher. Furthermore, private student loans may have low interest rates but very high fees, which are paid back during the lifetime of the loan. Interest rates vary depending on the lending institutions, but they may be as high as 14 percent annually.
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