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Alright. This is the catch. You might get some cash for your college education, but it won't be there for long, so you can't treat it as a windfall and go on a major shopping spree. That's the thing about loans—you have to actually pay them back.

So they are more like “temporarily free money.” But that’s still a huge help for the students relying on a loan as part of their financial aid package, and families are taking out larger student loans to finance their education. In fact, college loans are the largest form of student aid, making up 54% of the total aid awarded each year.

Lend Your Ear: Different Types of Student Loans

There are basically two broad categories of loans: loans based on financial need and loans not based on financial need. You must fill out the FAFSA (Free Application for Federal Student Aid) application whichever way you decide to go.

If you demonstrate need, a need-based loan will be less expensive than a non-need loan (need-based loans usually have better terms). As mentioned above, to be eligible for a need-based loan, you have to fill out the FAFSA first.

College Loans Based on Financial Need

Perkins Loans and subsidized Stafford Loans are types of need-based college loans. (The Federal Family Education Loan Program and Direct loans are both considered Stafford Loans.) A subsidized loan means that the government pays the interest that accumulates on the loan while you are in school and during a six-month period after graduation, which means you save serious cash. Without this subsidy, you would either need to make interest payments while in school, or those payments would be added to the principal of the loan, making it a much more expensive loan.

What’s also advantageous about need-based loans is that they have low or fixed interest rates. For example, Stafford Loans have a fixed interest rate of 6.8% and the Perkins interest rate is currently 5%.

With a need-based federal student loan you also get the benefit of delayed repayment. That means no payments on principal are due until after you graduate or leave school. In other words, you don’t need to stress about money and paying it back… at least for a little bit of time!

A Penny for Your Thoughts: More Details on Need-Based Loans:

* Perkins Loan:

The Federal Perkins Loan is an institutional, campus-based loan that is administered directly by the financial aid office at each participating school. In other words, your school is the lender, even though the loan is made up of government funds. Your school will either pay you directly or apply your loan to your school charges. You should receive the loan in at least two payments during the academic year. You can borrow up to $4,000 for each year of undergraduate study with a maximum of $20,000 for your entire undergraduate degree. The amount you receive depends on when you apply, your level of financial need and the funding level at your school.

How does it work?
If you have been awarded a Perkins Loan, the financial aid office sends you a promissory note (a note that says you promise to pay your loan back) that must be signed and returned. Then the school simply transfers the loan to your student account. And there you have it — money in your hands… for now. Eventually you will have to pay it back. Actually, you can find different repayment plans and you can even pay your loan back in small installments over a 10-year period.

* Subsidized Stafford FFEL Program Loan:

Funds from your Federal Family Education Loan (a.k.a. FFEL Program) will come from a bank, credit union or other lender that participates in the program. You’ll need to choose a lender if you obtain a FFELP Stafford Loan (today many lenders offer online loan applications). Schools that participate in the FFEL Program will usually have a list of preferred lenders.

How does it work?
Once you complete a loan application and the loan is approved, the money is sent by the lender to your school. The loan amount will appear as credit on your account. Student loan borrowers may choose a lender from that list, or choose a different lender of their preference. Your loan money must first be applied to pay for tuition and fees, room and board and other school charges. If money remains, you’ll receive the funds by check or in cash.

* Subsidized Direct Loans:

Direct loans (or the Federal Direct Student Loan Program) is a type of Stafford Loan, only in this case the federal government is the lender. And you repay your loan to the U.S. department of Education’s Direct Loan servicing center.

College Loans Not Based on Financial Need

These student loans are not as lucrative: they usually come with higher interest rates and the repayment plans are not as flexible (for example, you may not be able to repay your loan in small increments, over a longer period of time). They are definitely there if you need support, but you should use this type of financial aid as a last resort.

* Unsubsidized Stafford Loans (FFEL Programs and Direct Loans):

These loans basically work the same way as the subsidized Stafford Loans, except for one major difference. This time you have to pay the interest, although you can defer the payments until after graduation.

* Federal PLUS Loans:

This is a loan for parents, which probably sounds good to you because it means that your parents are responsible for paying it back. The PLUS Loan is sponsored by the federal government and is unrelated to need. It’s actually the largest source of parent loans.

How do they work?
Generally, your parents can borrow up to the total cost of education, minus any aid received. If the loan is approved, the money is sent directly to the school and repayment starts within 60 days after the final disbursement of the loan.

* Private or alternative loans:

Private education loans are available to students, usually at higher interest rates than the federal loans described above. Colleges and universities may provide a list of private loan sources; you can check with banks or other financial institutions with which you have accounts to see if they apply. These should also be reserved once you’ve tried all other options. Although they are not necessarily considered college financial aid loans, for many families these loans are a key way to afford paying for college.