March 24, 2010
Education loans are loans like any other: they need to be repaid, with interest and strict terms of repayment. Loans are financed by the federal government or private lenders. Before taking on student loans, students should exhaust every opportunity for awards that don't need to be repaid. Yet, despite college savings and award money, many students still need to borrow. Loans are commonly the last piece of the financial aid puzzle but students should avoid thinking they have come into a windfall. Borrowing is best done with restraint. Calculate your exact college costs and borrow no more than necessary. Repayment should not be a notion deferred until graduation: while in school, students should adhere to a strict budget, avoid accruing credit card debit, and make pains to save money dedicated to loan payoff.
Federal student loans offer borrowers many benefits not typically found in private loans. These include low fixed interest rates, income-based repayment plans, cancellations for certain employment, and deferment options, including deferment of loan payments when a student returns to school. The Federal Student Aid website, Student Aid on the Web, provides detailed information for all aspects of student loans.
Perkins Loans: These loans are available to both undergraduate and graduate students that demonstrate significant need. Loan amounts are figured in context of other aid granted to students, as well as available school funds. Loan is administered through the school: the school will directly dispense funds and funds are repaid directly to the school; repayment term can extend to ten years depending on repayment amount. Undergraduates can currently borrow a maximum of $5,500 per year, with a total maximum of $27,500. Graduate students can currently borrow a maximum of $8,000 per year, with a total maximum of $60,000. Interest rate is currently fixed at 5%.
Stafford Loans: These are available to undergraduate and graduate students enrolled at least half-time. Loan amounts depend on your school year, whether you are a dependent, and whether your parents have qualified for PLUS loans. Stafford Loans are funded in two ways, either from the Federal Family Education Loan Program (FFEL) or the William D. Ford Federal Direct Loan Program (Direct Loan). FFEL funds come from a bank, credit union, or other lender that participates in the program. Under the Direct Loan Program, loan funds come directly from the federal government. Issued loans must first be applied to tuition, fees, room and board; any remaining money is left to the student. Students can defer surplus for use toward future school costs or allocate at their own discretion.
The Stafford Loan takes two forms: subsidized and unsubsidized. Subsidized Stafford Loans are based on need. The government subsidizes loan interest that accrues while students are in school; interest rate for subsidized loans is currently at 5.6%. Interest rates will decrease for loans issued through July 2008 and June 2012, after which rates will increase to 6.8%. Unsubsidized Stafford Loans, on the other hand, are issued regardless of need but interest accrues while students are in school. Interest rate for unsubsidized loans is currently 6.8%. The repayment term for Stafford Loans can be between 10 and 25 years depending on loan amount and repayment schedule. In 2009, the Income-Based Repayment program went into effect, capping direct federal loan payments at 15% of discretionary income per month. If an outside lender doesn't offer a similar income-based repayment, there is always the option to consolidate within a federal loan.
Maximum Stafford Loan Amounts for Dependent Students
- First-Year Dependents: $5,500 ($3,500 subsidized, $2,000 unsubsidized)
- Second-Year Dependents: $6,500 ($4,500 subsidized, $2,000 unsubsidized)
- Dependents Beyond Second-Year: $7,500 ($5,500 subsidized, $2,000 unsubsidized)
- Total Cap for Dependent Students: $31,000 ($23,000 subsidized)
Maximum Stafford Loan Amounts for Independent Students & Dependents whose parents were denied PLUS loans.
- First-Year: $9,500 ($3,500 subsidized, $6,000 unsubsidized)
- Second-Year: $10,500 ($4,500 subsidized, $6,000 unsubsidized)
- Third-Year and Thereafter: $12,500 ($5,500 subsidized, $7,000 unsubsidized)
- Total Cap: $57,500 ($23,000 subsidized)
Maximum Stafford Amounts for Independent Graduate or Professional Students
- Graduate/Professional: $20,500 ($8,500 subsidized, $12,000 unsubsidized.)
- Total Cap of $138,500 ($65,000 subsidized, including undergraduate Stafford)
- Note: Medical and Health Professional students merit higher caps.
PLUS Loans: These loans are designed for parents of dependent undergraduate or graduate students. There is no set loan limit but loan amount maximum is determined by the difference between the cost of school attendance and any other aid awarded to the student. Interest rate for PLUS loans is currently at 8.5%. Repayment terms can vary between 10 and 25 years depending on loan amount but does not include the grace period usually afforded to students. Parents, however, may qualify for tax deductions for education loan interest.
Private loans, or alternative loans as they are sometimes called, are financed by banks, credit unions, or other lending institutions. They are often advised as last resort for borrowers but are not without advantages to students. If you need to take on a private loan, do so with the consultation of a financial advisor or a financial aid officer to ensure the terms and repayment options are favorable to your circumstances.
- Private loans are not need based and can cover full amounts needed to cover remaining tuition costs. They can also be used toward expenses other than tuition. (Federal loans consider need and apply caps to loan amounts.)
- Private loan rates are typically higher and often utilize variable rates that can drastically affect payments. (Federal loans are built on fixed interest rates.)
- Private loans rely heavily on credit history. Good credit can yield good rates for private loan borrowers. (Federal loans do not discriminate on the basis of credit scores.)
- Private loans can be issued at any time and do not adhere to the FAFSA timetable. (Federal loans are contingent on the FAFSA, which needs to be submitted months in advance of school start date.)
- Private loans do not always offer a deferment option. (Federal loans typically can be deferred if borrowers return to school half-time or in some cases of proven economic hardship.)
- Private loan repayment plans tend to be more flexible but longer, with greater accrual of interest. (Federal repayment plans tend to be shorter and greater in amount but have options that customize monthly payments based on income.)
- "Loan Programs Fact Sheet", Federal Student Aid (http://studentaid.ed.gov/students/attachments/siteresources/Loan_Programs_Fact_Sheet_04_2009.pdf)
- "Smart Borrowing", Higher Education Services Corporation, Jan 2010 (http://www.hesc.com/content.nsf/SFC/7/Smart_Borrowing)
- "The New Math of Financial Aid" Finding the Right College For You, Kaplan/Newsweek, Winter 2010
- U.S. Department of Education, Federal Student Aid, Funding Education Beyond High School: The Guide to Federal Student Aid 2009–10, Washington, D.C., 2008
- "Student Loans" FinAid (http://www.finaid.org/loans/studentloan.phtml)