While included in the term "financial aid" Higher Education Loans differ from scholarships and grants in that they must be paid back. They come in several flavors in the United States

• Federal Student Loans made to students directly: No payments until after graduation, but amounts are quite limited
• Federal Student Loans made to parents: Much higher limit, but payments start immediately
• Private Student Loans made to students or parents: Higher limits and no payments until after graduation.

FEDERAL LOANS TO STUDENTS

Federal student loans in the United States are authorized under Title IV of the Higher Education Act as amended.

The first type are loans made directly to the student, you may have heard of them as "Perkins" loans. These loans are available to college and university students and are used to supplement personal and family resources, scholarships, grants and work-study. They are subsidized or unsubsidized depending on the student's financial need.

What do subsidized and unsubsidized federal student loans have in common?

Both types are guaranteed by the U. S. Department of Education either directly or through guaranty agencies, so nearly all students are eligible to receive them (regardless of credit score or other financial issues). Both types offer a grace period of 6 months: no payments are due until six months after graduation, or 3 months after you become a less-than-full-time student without graduating. Both types have a fairly modest annual limit - currently $2,800 per year - regardless of the student's actual cost of education.

How are they different?

It boils down to whether you or the government pays the interest while you're in school. Subsidized Federal student loans are offered to students with a demonstrated financial need - generally requiring quite a low family income. For these loans, the federal government makes interest payments while the student is in college - if you borrow $10,000, you'll owe $10,000 when you graduate.

Unsubsidized federal student loans are also guaranteed by the government, but the government does NOT pay interest for the student, rather the interest accrues during college - if you borrow $10,000, you'll owe $10,000 PLUS INTEREST when you graduate. The accrued interest will be "capitalized" into your loan amount, and you'll start making payments on that total. For example you might have borrowed $10,000 and had $2,000 accrue in interest. After graduation, your loan amount would become $12,000. Interest would start accruing on that amount and your payment will be based on that amount. You may also choose to pay the interest while you're in college (probably a smart move if you can come up with the money), in which case you graduate with just your baseline debt.

FEDERAL STUDENT LOANS TO PARENTS

Usually you will hear these referred to as PLUS loans (Parent Loans for Undergraduate Students). Unlike loans made to students, parents are able to borrow much more - usually enough to cover any gap in the cost of education. However, there is no grace period whatsoever. Payments start immediately.

Parents should be aware that THEY are responsible for repayment on these loans, not the student. This is not a 'cosigner' loan with the student having equal accountability. The parents are on the hook to pay and if they do not do so, it is their credit that will suffer. Also, parents are advised to consider "year 4" payments, rather than "year 1" payments. What sounds like a "manageable" debt load of $200 a month in freshman year can mushroom to a much more daunting $800 a month by the time 4 years have been paid for through borrowing. The combination of immediate repayment and the ability to borrow substantial sums can be dangerous.

PRIVATE STUDENT LOANS

These are simply what they say. Loans made to students by private finance companies; sometimes banks, sometimes specialized education lenders.

In some ways, private loans combine the best elements of the different government loans into one. They generally offer higher loan limits then direct-to-student federal loans, ensuring the student is not left with a budget gap and forced to leave school. At the same time, they offer competitive interest rates and a grace period with no payments due until after graduation. Many private lenders mirror the government's six month grace period.

Private loans do often carry an origination fee (much as certain preferred-rate mortgages carry 'points'). Some lenders offer low-interest, 0-fee loans; but these are usually available only to those with truly superb (i.e. 800+) credit scores. More commonly, loan origination fees from 3-9% are found. As with mortgages, you are often better off to pay a modest fee and get an advantageous interest rate. While a 0 fee loan at Prime+3% interest might not sound bad, you're actually better off paying a 7% fee with Prime+1% interest. Each percentage on the front-end fee gets paid once; each percentage point on the interest rate gets paid over-and-over again for the life of the loan. Paying 1% more in interest to get 1% less in fees is a BAD DEAL.

In any case, don't be scared off by the fee. While you should get as much money as you can from scholarships, grants and federal to-the-student loans, Private student loans are a far better alternative to fill any remaining gap than high-interest 'signature' loans such as you local bank may provide, or (worst of all) racking up credit card debt at 20% annual interest to pay for college.

HOW THE MONEY GETS TO THE STUDENT OR THE SCHOOL

There are two distribution channels for Federal student loans. The channels are identified by their names: Federal Direct Student Loans and Federal Family Education Loans. Federal Direct Student Loans, also known as Direct Loans, or FDLP loans are funded from public capital originating with the U. S. Treasury. FDLP loans are distributed through a channel that begins with the U. S. Treasury Department, and from there passes through the U. S. Department of Education, then to the college or university and then to the student. Federal Family Education Loan Program loans, also known as FFEL loans or FFELP loans, are funded with private capital provided by banking institutions (ie: banks, savings and loans, and credit unions). Because the FFELP loans use private capital as their source, students who use FFELP loans are able to take advantage of payment options that are similar to those available to customers who take out a home loan or a consumer loan. For example, some institutions will allow a discount for automatic payments, or a series of on-time payments. In 2005, approximately 2/3 of all federally subsidized student loans are FFELP.

The maximum amount that any student can borrow is adjusted from time-to-time as Federal policies change. A study published in the Winter, 1996 edition of the Journal of Student Financial Aid, titled “How Much Student Loan Debt is Too Much” suggested that debt for the average undergraduate should not exceed 8% of total income after graduation. Some financial aid advisors have referred to the 8% level as “the 8% rule.” Circumstances vary for individuals, so the 8% level is an indicator, not a rule set in stone.

For Private Loans it is far simpler. The lender generally disburses the money directly to the school. Any funds borrowed beyond tuition and fees is given to the student for living expenses, room, board, etc.