Perkins Student Loans vs. Private Student Loans: What’s the Difference?

by Katherine Pilnick

For individuals looking to attend college, high tuition prices can be a major cause for concern. Both public and private lenders offer numerous financial aid sources to help struggling students pay for college. Perkins loans and private student loans are among students' financial aid options. While both can help cover educational costs, they have major differences.

Perkins Loans

Perkins student loans are available only to financially needy students. They are funded by the federal government but are disbursed by individual schools. This means that the government dispenses money for Perkins loans to about 1,700 colleges and universities. The schools then decide individually which of their students qualify for this type of loan, passing the money on to students. Perkins loans require no credit checks.

Eligible undergraduate students may receive up to $5,500 in Perkins loans each year, for a total of $27,500. Eligible graduate students can borrow more, up to $8,000 per year. Graduate students may borrow a total of $60,000 in Perkins loans, which includes any amounts borrowed during their undergraduate studies. These maximum amounts are recalculated periodically to keep up with inflation.

Because these loans are available only to exceptionally needy students, they are offered at a low interest rate of 5 percent. Students do not have to begin repaying their loans until once they are done with school and their nine-month grace period has ended. Interest will not begin to accrue until this time, meaning students face no interest charges while they complete their studies.

Perkins loans also offer opportunities for loan forgiveness. Students who go into certain lines of work or meet other specific criteria may not have to repay their loans. For example, Perkins loans may be canceled for students who volunteer with certain organizations, enlist in the military or teach in underserved areas.

Students should complete the Free Application for Federal Student Aid (FAFSA) to find out if they qualify for Perkins loans or other federal financial aid.

Private Student Loans

Private student loans are offered by private lenders like banks. They do not require students to prove financial need, but they do require applicants to undergo credit checks.

A student's credit score directly affects his or her ability to receive private education loans. Students with the highest scores are considered the most responsible and are given loans at the lowest interest rates. Students with lower scores may still be granted loans but will have to pay higher interest rates. Students with scores below 650 may not qualify for a private loan at all.

As with Perkins loans, some private loans have grace periods and do not require students to pay anything until a certain number of months after they complete school. Even with a grace period, however, a student's loan typically will accrue interest throughout the life of the loan. Such details of the loan are decided at the lender's discretion.

Maximum loan amounts also vary by lender. Some cap undergraduate loans around $30,000 per year, while others allow students to borrow up to the full cost of education.

In general, it's better to borrow a Perkins loan or other type of federal student loan than it is to take out a private loan to help pay for school. Still, federal aid may not cover a student's full educational costs. In that case, private student loans can be used to close the gap.

This post was written by Katherine Pilnick

Katherine Pilnick writes about issues related to credit, debt and personal finance for, America’s Debt Help Organization.

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