Student loans allow you to borrow money for college even if you have little or no credit history. The federal government sponsors several types of student loans. To apply for these, you must complete the Free Application for Federal Student Aid (FAFSA) form, which requires you to give financial information to your government so the government can estimate your ability to pay for schooling. Private lenders also may offer student loans. Those who take out student loans receive a tax benefit that may allow them to deduct all or some of the interest when repaying the loan.
Subsidized Stafford Loans
Subsidized Stafford loans are made to students based on demonstrated need calculated from the information on the FAFSA form. The federal government pays the interest on the loan as long as you are in school. The maximum amount of Stafford loans is limited, and the limits are adjusted periodically for inflation. For 2009, first-year students can take up to $3,500 in loans, second-year students up to $4,500 and third-year students and older can take $5,500 per year.
Unsubsidized Stafford Loans
Unsubsidized Stafford loans are also backed by the federal government but the loans do not have the interest paid while you are in school. You can either make interest-only payments or allow the interest to accrue. The limits for unsubsidized Stafford loans are cumulative with subsidized Stafford loans so each dollar of subsidized loans you have reduces the amount of unsubsidized loans you can take and depends on whether or not you are claimed as a dependent on someone's tax returns. If you are a dependent, you can take up to $5,500 the first year, $6,500 the second year and $7,500 each year after. If you are an independent student, the limit is $9,500 for the first year, $10,500 for the second year and $12,500 for each year after.
Perkins loans are another type of loan that is backed by the federal government. The difference between Perkins loans and Stafford loans lies in who determines which students get the loans. Each year, participating colleges and universities are allotted a certain amount of money from the federal government to make Perkins loans. Then the schools, rather than the government, determine which students will be offered loans. If you are an undergraduate, you are able to take a maximum of $5,500 per year in Perkins loans, and if you are a graduate student, you can take a maximum of $8,000 per year. Like subsidized Stafford loans, the government pays the interest on the loan as long as you are in school.
Private companies are usually a last resort for student loans because they are not backed by the federal government. These loans will usually require a credit check or require a co-signer to protect the lender against the possibility of you defaulting on your loans. These loans also have higher interest rates.
As long as a loan is taken out to pay for educational expenses, the interest that you pay on it can be tax deductible. The maximum deduction and income restrictions are changed annually to adjust for inflation. For 2009, the maximum deduction is $2,500. If you are married filing jointly and your adjusted gross income is less than $120,000, you can take a full deduction. If your income is between $120,000 and $150,000, you will only be allowed a reduced deduction. If your filing status is anything other than married filing jointly, your income can be up to $60,000 before your maximum deduction is reduced. If you make between $60,000 and $75,000, you can take a reduced deduction. This deduction is an above-the-line deduction, meaning that you can take the deduction in addition to the standard deduction. The standard deduction is a set amount that you can deduct from your taxes each year if you chose not to itemize your deductions. If you take itemized deductions, you cannot claim the standard deduction.
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