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How to Choose the Best Education Loans

Mark Kantrowitz

May 03, 2010

With the new Obama tuition plan do you now have to go through FAFSA to get a loan? Is it better to take a loan out in my child’s name or take a parent PLUS loan? — Michelle A.

As of July 1, 2010, all federal education loans are now made through the Direct Loan program. This includes federal student loans, such as the subsidized and unsubsidized Stafford loans, and parent education loans, such as the PLUS loan. To obtain a federal education loan, contact the financial aid office at your child’s college.

The unsubsidized Stafford loan and the PLUS loan do not depend on financial need. The subsidized Stafford loan depends on financial need. Filing the FAFSA is a prerequisite for obtaining a Stafford loan. The FAFSA is not required if you are only interested in a Parent PLUS loan, since a loan application and promissory note will be sufficient. (The FAFSA is, however, required for a Grad PLUS loan.) But it is better to submit the FAFSA anyway, since your child may qualify for the subsidized Stafford loan and maybe even some federal and state grants.

The Stafford loan has a lower interest rate and lower fees than the PLUS loan, so your child should borrow the Stafford loan first. The PLUS loan is available after the Stafford loan limits have been exhausted. Income-based repayment is available as a safety net for the Stafford loan, but not for the Parent PLUS loan (or private student loans).

Is it true you can get loans for college and do not have to pay them back as long as you get your Master’s degree? — Paul D.

This is a myth. It is not true.

While education grants do not have to be repaid, student loans have to be repaid with interest.

You do not have to repay your student loans until six months after you graduate or drop below half-time enrollment. If you enroll in graduate or professional school immediately after receiving your Bachelor’s degree, you can continue to defer repayment of your loans while you are still in school. But once you graduate with your Master’s or other advanced degree you will have to begin repaying your loans.

Some employer tuition assistance programs will pay for all or part of an employee’s education, but only if the employee maintains a minimum GPA. In a few cases the employer will reimburse the tuition expenses only if the employee graduates with the degree.

There are also a variety of loan forgiveness programs for working in a particular career, such as public service. For example, the TEACH Grant requires the recipient to work as a teacher in a national need area for four of the eight years after graduation. If the recipient fails to fulfill the service requirement, the grant is retroactively turned into an unsubsidized Stafford loan.

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