Student Loans - Explained in plain English
With all the different types of financial aid available, it can become confusing.
Below are some students loans explained in an easy to understand manner.
Stafford loan
A Stafford loan is a federal loan program that allows students to borrow
to pay for college. Loans are made by either a private lender or directly
from the federal government.
If eligible, a student can receive a subsidized loan, which means that the
government pays interest on the loan until the grace period ends.
Unsubsidized loans are available to all students, who can elect to pay interest
before or after the loan repayment period begins.
For the year beginning July 1, 2005, the maximum loan amount to undergraduates
is $23,000, if dependent, and $46,000, if independent.
For graduate students who borrow a subsidized Stafford loan, the maximum loan
amount is $65,500. Interest rates are set on July 1.
All students applying for a federal student loan are required to complete a
FAFSA loan application.
Perkins loan
A Perkins loan is a federal student loan program to pay for college.
Perkins loans are subsidized loans, which means the government pays the interest
until the end of the loan grace period.
The annual interest rate on Perkins loans is capped at 5%. All students applying
for a federal student loan are required to complete a FAFSA loan application.
The grace period for Perkins loans is nine months.
PLUS loan
A PLUS loan is a federal loan program available to help parents pay college expenses
for a child. PLUS loans have a 10-year repayment period and require monthly payments
beginning two months after the loan is disbursed. Interest rates on PLUS and other
applicable federal education loans are reset every July 1.
FFELP
An acronym that stands for Federal Family Education Loan Program.
This is a federal student loan program for Stafford loans where a private lender
such as a bank or credit union disburses the loan to the student.
Loans are guaranteed by the federal government.
FDSLP
An acronym that stands for Federal Direct Student Loan Program.
This is a federal student loan program for Stafford loans where the federal government
disburses the loan to the student. Loans are administered by the participating school.
UGMA/UTMA accounts
UGMA/UTMA accounts are custodial accounts with limited tax advantages that are used
for giving to a child or other beneficiary under the age of 18 or 21.
UGMA is an acronym for Uniform Gifts to Minors Act.
UTMA is an acronym for Uniform Transfers to Minors Act.
UGMA accounts are generally limited to the transferring only such liquid assets as
stocks, bonds and other savings deposits. UTMAs allow for transfers of such illiquid
assets as real estate. Depending on the state you live in, you would use either an
UGMA or UTMA.
In some cases, both laws may apply. You should consult a tax or financial
adviser to more thoroughly understand UGMAs and UTMAs.
UGMA/UTMA accounts are custodial accounts you may use to save for your child’s
college education. Another advantage of using an UGMA/UTMA account is that earnings
on the account are taxed at the child’s rate if the child is at least age 14.
This rate is usually the lowest tax rate of 10%.
If the child is under 14, the first $750 in earnings on an UGMA/UTMA account is
TAX-FREE. The next $750 is taxed at the child’s tax rate. At higher levels,
earnings on the account are taxed at your income tax rate.
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