Best Federal Loans for Undergraduates

May 15, 2018
By: Mason Gallik

There are many types of federal student loans that can appear in a financial aid package for undergraduate students. Stafford subsidized, Stafford unsubsidized, Perkins, and Parent PLUS are all federal student loans that can be used to help pay for an undergraduate education. Each of these loans have positives and drawbacks. This article will explain which loans should be used first based on current interest rates and origination fees.

Let’s assume that you are enrolling as a freshman in a 4-year program. The effective interest rates on federal student loans with a 10-year repayment plan that begins after your studies would be:

Stafford subsidized: 2.52%
Perkins: 2.69%
Stafford unsubsidized: 4.53%
Parent PLUS: 7.39%

Stafford subsidized and Perkins loans are very similar with listed interest rates of 4.45% and 5% respectively. These loans have lower effective interests rate because they are subsidized, which means you do not get charged interest while you are enrolled full time. Stafford subsidized loans have an origination fee of 1.066%, but this is overwhelmed by the potential 4-year subsidy when calculating effective rates. This subsidy can be a major benefit because you essentially receive these loans interest free while you are in college, which significantly decreases the effective interest rate.

Stafford unsubsidized loans and Parent PLUS loans accrue interest during your studies and have interest rates of 4.45% and 7% respectively. They also have origination fees of 1.066% for Stafford unsubsidized loans and 4.264% for Parent PLUS loans. Remember though, that Parent PLUS loans are to be repaid by the parent, while the others mentioned in this article are under the student’s name. These loans have higher effective interest rates than their listed rate because of their origination fees.

The order above continues to work for second, third, and fourth year students. However, the effective interest rates for Stafford subsidized and Perkins are higher by your fourth year of studies because you will only be getting a short time of interest free loans since you will likely be graduating in a much shorter amount of time. However, if interest rates rise on Stafford subsidized loans this upcoming year, Perkins may become the best loan to take out with the lowest effective interest rate. The next article will be on which loans are the best for graduate students!