Federal Student Loans

The most common federal student loans are Stafford and PLUS loans. The biggest distinction between the two is that, for undergraduates, Stafford loans are loans made to students and PLUS loans are loans made to parents. Regardless of who’s going to be repaying the loan, it’s worth looking at both to determine which is a better deal.

With a Stafford loan, the student is the borrower. Stafford loans have an annual loan limit depending on the student’s year in school and whether or not they are independent. A dependent freshman can borrow $5,500. That amount increases to $7,500 by the third undergraduate year. Stafford loans have a fixed 3.86% interest rate and a 1.072% loan fee. Because most 18-year-olds have minimal credit history, credit ratings are not considered in the Stafford loan process. Students with financial need may receive a portion of their loan Subsidized, which means that no interest accrues until graduation.

A PLUS loan is taken out by the parent. It has advantages and disadvantages compared with a Stafford loan. You can borrow substantially more with a PLUS loan than a Stafford loan: up to the full cost of attendance at your school, minus any aid received. In exchange for that, though, you’ll pay a higher interest rate (6.41%, fixed) and loan fee (4.288%). And because larger sums are involved, credit worthiness is verified.

Stafford loans tend to be the best starting point for most families, regardless of who will be repaying the loan. Why? Because of the much lower interest rate and fees. In addition, student loan interest is tax deductible, but only to the named borrower and only within income limits (the deduction phases out between $60,000-$75,000 for single filers and $125,000-$155,000 for married filing joint). Many parents are not eligible for the deduction, but most recent college graduates are. If you aren’t eligible, think of the tax deduction as a gift to your college student or graduate—it may be worth several hundred dollars a year to them. Which is about the same amount as a monthly payment on four years of Stafford loans consolidated.

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