4 Types of Federal Student Loans to Consider

Editor's note This article originally was published in the April 2014 issue of Kiplinger's Personal Finance.

Finding the right fit also means keeping student debt within reason. One benchmark suggests that students should borrow no more than they expect to earn in their first year in the workforce. (Students who borrow graduate with an average of $29,400 in debt, according to the Project on Student Debt.) Max out federal loans before even considering private debt: Federal loans come with flexible repayment programs and other protections. Here are the federal loans available to undergraduates or their parents.

Direct Subsidized (Stafford). With these loans, available to undergraduates with financial need, the feds cover the interest through school and up to six months after graduation. (For loans taken out between July, 1, 2012, and July 1, 2014, that grace period after graduation won’t be covered.) You can borrow up to $3,500 your first year, $4,500 your second year and $5,500 after that, for a maximum of $23,000 for undergraduates. The interest rate—4.66% for loans taken out for the 2014–15 academic year—is fixed, but it resets for new loans each year.

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Direct Unsubsidized (Stafford). You don’t need to demonstrate financial need to take an unsubsidized loan. The interest begins accruing while you’re in school. The annual maximum for undergraduates ranges from $5,500 to $7,500, minus any subsidized loans received over the same period. As with subsidized loans, you will repay this year’s loans at 4.66%; the rate resets each year for new loans.

Perkins. These federal student loans are for undergraduate and graduate students with high financial need. The interest rate is a fixed 5%, and undergraduates can borrow up to $5,500 a year, for a total of up to $27,500.

PLUS. For these loans, available to parents, you must undergo a credit check to prove that you have no “adverse” credit history—for example, declaring bankruptcy within the past five years. You can borrow up to the cost of attendance (minus other financial assistance your student has received); the current interest rate is a fixed 7.21%.