The Hierarchy of Student Debt

Now that the holidays are here, I hope you are relaxing with a glass of egg nog and a good book. While you are (hopefully) relaxing, here is some information on a topic students find a bit stressful: student loans!

Law Students everywhere rely upon student loans to fund the bulk of their education, both tuition and living expenses (see our student budget here). There are many different types of loans however, and some are better than others. So here is my list of the various loans, from 'best' to 'worst', in my humble opinion.

There are two main types of loans, 'fixed rate' and 'adjustable rate'. Fixed rate loans have an interest rate that stays the same for as long as you have the loan, whereas 'adjustable rate' loans have an interest rate that changes every few months based on the economy and other factors.

There are also 'subsidized' loans offered through government programs that offer special advantages other loans do not, such as being cancelled if you enter certain careers. Depending on your situation, these advantages may be wonderful or irrelevant, but usually they are good to have, just in case.

Here are the main loan types, from best to worst:

1. Parental or Family Loans: This is a loan from a family member, maybe a grandparent, parent, or other relative, and this is the best loan available. It is usually worth talking to your parents, relatives, or others, to see if they are interested in loaning you some money for school. These loans are great because they are flexible, low (or no) interest, and you know the lender well. This is not a great option for everyone, unfortunately.
2. Federal Perkins Loans: These loans are need-based loans of up to $6,000 per year at a fixed interest rate of 5%. You qualify for these loans by filling out a FAFSA which details your finances. Unlike college, for grad school you do not have to list your parental information. During school, the government pays the interest on these loans for you, so you only start paying interest after graduation. 
3. Federal Stafford Subsidized Loans: These loans are for up to $8,500 per year at a fixed interest rate of 6.8%. You qualify for these loans with the FAFSA, and the government also pays the interest on these loans while you are in school. This is a very good option, and may get even better if the new Congress follows through on its promise to lower the interest rate to 3.4%. So write your congressperson!
4. Federal Unsubsidized Stafford Loans: These are similar to the Subsidized Stafford loans, but with two differences. First, interest on these loans will accrue while you are in school, which makes them much less attractive. Second, you can borrow up to $10,000 per year of this loan, or more if you don't qualify for Subsidized Stafford loans. A nice thing about Stafford loans is they are not credit-based, so even if you have horrible credit (and are a US Citizen or permanent resident) you still can get these loans.
5. Grad PLUS loans: New this year, graduate students can take out PLUS loans, which used to be just for parents. These are fixed-rate loans, the rate depends on the lender, but is usually between 7-8.5%. These loans have fees of 3-4%, and are credit based, so make sure and know your credit history!
6. Private or 'Alternative' Loans: These are student loans from a bank, and have variable interest rates, depending on the economy (bad economy usually means lower interest rates) and your credit score. Generally, the lower your credit score, the higher the interest rate, but even with a great credit score, rates on these are 7-10%. Some of the big lenders for these loans are Citibank and Access Group.
7. Credit Cards: Credit cards typically have terrible interest rates compared to the loans mentioned above. The rates run from 13% to 24%, plus fees, and require monthly payments while in school. This is obviously not a great way to pay for school, but some students use their credit cards to pay for at least a portion of their expenses.

Well, that's pretty much all the loans we deal with at Chicago. As you can see, there is a wide variety of options for students, some of which are much better than others. Part of our mission is to help our admitted and current students understand their options and pick the loans that are best for their situation and goals.