Two-thirds of undergraduate students have some college loan debt at graduation, but despite being so commonplace there is still a lot of confusion regarding the various loan options and their terms.

Let’s quickly look at government sponsored loans. There are four basic types:

Stafford Loans

Stafford loans are borrowed by the students themselves. A fixed interest rate of 6.8% is levied on all loans given after July 1, 2006. The maximum loan amount is fixed at $2,625 for the first year, $3,500 for the second year and $5,500 for the third, fourth and fifth year of undergraduate education while $8,500 is available for each year in graduate school.

Undergraduate students can borrow up to $23,000 total while the total limit for graduate and undergraduate borrowing for any student is $65,500.

Some students also have the option of getting their loans subsidized, meaning while in school the government pays the interest amount due. The students start paying off the loan, without having accumulated interest during school, six months after graduation.

Perkins Loans

Perkins loans are solely a government subsidized student loan. They have a stable interest rate currently at 5% which is suspended from when students are in school until nine months after they graduate. Undergraduate students can borrow up to $4,000 yearly while graduate students can borrow $6,000 yearly. A student can borrow no more than $20,000 as an undergraduate and $40,000 total including graduate school.

PLUS Loans

PLUS loans are loans the government gives to parents for use in their child’s education. The rate of interest applicable on PLUS loans is 8.5% after July 1, 2006. The advantage of this kind of loan is that there is no existing upper limit for the amount parents can borrow; however, parents have to start paying the money back immediately - though some lenders also allow the students to pay back the loan.

Besides not having an upper limit, meaning a parent can borrow the full cost of education including books and room and board, the IRS allows tax deductions on the interest paid on these loans.

Despite these benefits to the PLUS loan and even if you want to pay for your child’s education, have them take Stafford or Perkins loans before you take a Plus loan. Financially it makes much better sense because your child can defer the payments until after graduation and will also be charged lower interest rates.

Graduate PLUS Loans

These loans are available only to graduate and professional students, and allow the student to borrow up to the full cost of their education excluding financial aid. The general terms of the PLUS loans for undergraduates apply, except here the student borrows the money instead of the parents.

If instead you’ve decided on going through a private lender to finance college, look at the terms carefully to get the best deal. Here are some of the most important questions to ask:

• How frequently is the interest on the loan calculated? The more often the interest is calculated the bigger the loan will be when it comes time to start paying because all the interest is just tacked on to principal while the student is still in school.
• Are there any payment rewards? Often lenders offer incentives for payments that are made on time with education loans – from reduced interest rates to lowering the original principal itself.
• Is there a consolidation plan?  Though loan consolidation is rightly viewed with suspicion in general, it is a very good way to save money after graduating with college loans.