| Student loans are loans offered to students | | | | throughout the life of the loan. Some have |
| to assist in payment of the costs of | | | | suggested that this makes the interest rate |
| professional education. These loans usually | | | | more critical than the origination fee. |
| carry lower interests than other loans, and | | | | |
| are usually issued by the government. Often | | | | In fact, there is any easy solution to the |
| they are supplemented by student grants which | | | | fee-vs-rate question: ALL lenders are legally |
| do not have to be repaid. | | | | required to provide you a statement of the |
| | | | "APR - Annual Percentage Rate" for the loan |
| Loans for Higher Education | | | | before you sign a promissory note and commit |
| | | | to it. Unlike the "base" rate, this rate DOES |
| While included in the term "financial aid" | | | | include any fees charged and can be thought |
| Higher Education Loans differ from | | | | of as the "effective" interest rate including |
| scholarships and grants in that they must be | | | | actual interest, fees, etc. When comparing |
| paid back. They come in several varieties in | | | | loans, it may be easier to compare APR rather |
| the United States: | | | | than "rate" to ensure an apples-to-apples |
| | | | comparison. APR is the best yardstick to |
| Federal Student Loans made to students | | | | compare loans which have the same repayment |
| directly: No payments until after graduation, | | | | term; however, if the repayment terms are |
| but amounts are quite limited | | | | different, APR becomes a less-perfect |
| | | | comparison tool. With different term loans, |
| Federal Student Loans made to parents: Much | | | | consumers often look to 'total financing |
| higher limit, but payments start immediately | | | | costs' to understand their financing options. |
| | | | |
| Private Student Loans made to students or | | | | Eligibility Private student loan programs |
| parents: Higher limits and no payments until | | | | generally issue loans based on the credit |
| after graduation, although interest will | | | | history of the applicant and any applicable |
| start to accrue immediately. | | | | co-signer/co-endorser. This is in contrast to |
| | | | federal loan programs which deal primarily |
| FEDERAL LOANS TO STUDENTS | | | | with need-based criteria, as defined by the |
| | | | EFC and the FAFSA, For many students, this is |
| Federal student loans in the United States | | | | a great advantage to private loan programs, |
| are authorized under Title IV of the Higher | | | | as their families may have too much income or |
| Education Act as amended. | | | | too many assets to qualify for federal aid, |
| | | | but insufficient assets/income to pay for |
| The first type are loans made directly to the | | | | schooling without assistance. |
| student. These loans are available to college | | | | |
| and university students and are used to | | | | Additionally, many international students |
| supplement personal and family resources, | | | | studying in the United States can obtain |
| scholarships, grants and work-study. They may | | | | private loans (they are ineligible for |
| be subsidized by the U.S. Government, or may | | | | federal loans in many cases) with a co-signer |
| be unsubsidized depending on the student's | | | | that is a United States citizen/permanent |
| financial need. | | | | resident. |
| | | | |
| Both subsidized and unsubsidized loans are | | | | The terms for alternative loans vary from |
| guaranteed by the U.S. Department of | | | | lender to lender, and a common suggestion is |
| Education either directly or through | | | | to shop around on ALL terms, not just respond |
| guarantee agencies. Nearly all students are | | | | to "rates as low as..." tactics that are |
| eligible to receive them (regardless of | | | | sometimes little more than bait-and-switch. |
| credit score or other financial issues). Both | | | | Examples of other borrower terms and benefits |
| types offer a grace period of 6 months, which | | | | that vary by lender are: Deferrments (amount |
| means that no payments are due until 6 months | | | | of time after leaving school before payments |
| after graduation, or 3 months after the | | | | start) and forebearences (a period of time |
| borrower becomes a less-than-full-time | | | | where payments are temporarily stopped due to |
| student without graduating. Both types have a | | | | financial or other hardship). These policies |
| fairly modest annual limit regardless of the | | | | are solely based on the contract between |
| student's actual cost of education. The | | | | lender and borrower and not set by Department |
| present limit in January 2006 is $2,625 per | | | | of Education policies. |
| year for freshman undergraduate students, | | | | |
| $3,500 for sophomore undergraduates and | | | | Federally subsidized consolidations are not |
| $5,500 per year for junior and senior | | | | available for alternative student loans, |
| undergraduate students. | | | | though several lenders offer private |
| | | | consolidation programs. Borrowers of |
| Subsidized Federal student loans are offered | | | | privately subsidized student loans may face |
| to students with a demonstrated financial | | | | the same restrictions to bankruptcy discharge |
| need: generally requiring a low family | | | | as for government based loans: new |
| income. For these loans, the federal | | | | legislation makes clear that these loans are, |
| government makes interest payments while the | | | | like federal student loans, not dischargeable |
| student is in college. For example, those who | | | | under bankruptcy. However, even before the |
| borrow $10,000 during college will owe | | | | legislation was passed, private student loans |
| $10,000 upon graduation. | | | | that were guaranteed 'in whole or in part' by |
| | | | a non-profit entity are non-dischargeable in |
| Unsubsidized federal student loans are also | | | | bankruptcy (and most private loans, |
| guaranteed by the U.S. Government, but the | | | | regardless of the lender, were indeed |
| government does not pay interest for the | | | | guaranteed by a non-profit). |
| student, rather the interest accrues during | | | | |
| college. or example, those who have borrowed | | | | Types Private loans generally come in two |
| $10,000 and had $2,000 accrue in interest | | | | types: school-channel and direct-to-consumer. |
| will owe $12,000. Interest will begin | | | | School channel loans offer borrowers lower |
| accruing on the $12,000. Those who borrow | | | | interest rates but generally take longer to |
| $10,000 during college will owe $10,000 PLUS | | | | process. School channel loans are 'certified' |
| INTEREST upon graduation. The accrued | | | | by the school, which means the school signs |
| interest will be "capitalized" into the loan | | | | off on the borrowing amount, and the funds |
| amount, and the borrower will begin making | | | | for school-channel loans are disbursed |
| payments on the accumulated total. Students | | | | directly to the school. |
| can also choose to pay the interest while | | | | |
| still in college. | | | | Direct-to-consumer private loans are not |
| | | | certified by the school; indeed, schools |
| Federal student loans for students of | | | | don't interact with a direct-to-consumer |
| medicine have higher limits, $8,500 for | | | | private loan at all. The student simply |
| subsidized Stafford and $30,000 maximum for | | | | supplies enrollment verification of one sort |
| unsubsidized Stafford. Many students also | | | | or another to the lender, and the loan |
| take advantage of the unsubsidized Perkins | | | | proceeds are subsequently disbursed directly |
| loan. For medical students the limit for | | | | to the student. While direct-to-consumer |
| Perkins is $6,000. | | | | loans generally carry higher interest rates |
| | | | than school-channel loans, they do allow |
| FEDERAL STUDENT LOANS TO PARENTS | | | | families to get access to funds very quickly |
| | | | - in some cases, in a matter of days. Some |
| Usually these are described as PLUS loans | | | | argue that this convenience is offset by the |
| (Parent Loans for Undergraduate Students). | | | | risk of student over-borrowing and/or use of |
| Unlike loans made to students, parents are | | | | funds for inappropriate purposes, since there |
| able to borrow much more - usually enough to | | | | is no third-party certification that the |
| cover any gap in the cost of education. | | | | amount of the loan is appropriate for the |
| However, there is no grace period whatsoever. | | | | education finance needs of the student in |
| Payments start immediately. | | | | question. |
| | | | |
| Parents should be aware that THEY are | | | | Direct-to-consumer private loans are the |
| responsible for repayment on these loans, not | | | | fastest growing segment of education finance, |
| the student. This is not a 'cosigner' loan | | | | and as such, a number of providers are |
| with the student having equal accountability. | | | | introducing products. Loan providers range |
| The parents are on the hook to pay and if | | | | from large education finance companies to |
| they do not do so, it is their credit that | | | | specialty companies that focus exclusively on |
| will suffer. Also, parents are advised to | | | | this niche. Such loans will often be |
| consider "year 4" payments, rather than "year | | | | distinguished by their indication that "no |
| 1" payments. What sounds like a "manageable" | | | | FAFSA is required" or "Funds disbursed |
| debt load of $200 a month in freshman year | | | | directly to you." |
| can mushroom to a much more daunting $800 a | | | | |
| month by the time 4 years have been paid for | | | | Disbursement: How the money gets to student |
| through borrowing. The combination of | | | | or school |
| immediate repayment and the ability to borrow | | | | |
| substantial sums can be dangerous. | | | | There are two distribution channels for |
| | | | Federal student loans. The channels are |
| Under new legislation graduate students are | | | | identified by their names: Federal Direct |
| now eligible to receive PLUS loans in their | | | | Student Loans and Federal Family Education |
| own names for studies. These loans have the | | | | Loans. Federal Direct Student Loans, also |
| same interest rates and terms and Parent PLUS | | | | known as Direct Loans, or FDLP loans are |
| loans. | | | | funded from public capital originating with |
| | | | the U.S. Treasury. FDLP loans are distributed |
| Parents should also be aware that current | | | | through a channel that begins with the U.S. |
| legislation will raise the interest rate on | | | | Treasury Department, and from there passes |
| these loans significantly, to 8.5% as of July | | | | through the U.S. Department of Education, |
| 1, 2006. | | | | then to the college or university and then to |
| | | | the student. Federal Family Education Loan |
| Private student loans | | | | Program loans, also known as FFEL loans or |
| | | | FFELP loans, are funded with private capital |
| These are loans which are not guaranteed by | | | | provided by banking institutions (i.e., |
| any governmental agency, and are made to | | | | banks, savings and loans, and credit unions). |
| students by banks or finance companies. | | | | Because the FFELP loans use private capital |
| Advocates of private student loans suggest | | | | as their source, students who use FFELP loans |
| that they combine the best elements of the | | | | are able to take advantage of payment options |
| different government loans into one: They | | | | that are similar to those available to |
| generally offer higher loan limits than | | | | customers who take out a home loan or a |
| direct-to-student federal loans, ensuring the | | | | consumer loan. For example, some institutions |
| student is not left with a budget gap. But | | | | will allow a discount for automatic payments, |
| unlike to-the-parent government loans, they | | | | or a series of on-time payments. In 2005, |
| generally offer a grace period with no | | | | approximately two-thirds of all federally |
| payments due until after graduation. This | | | | subsidized student loans are FFELP. |
| grace period ranges as high as 12 months | | | | |
| after graduation, though most private lenders | | | | According to the U.S. Education Department, |
| offer 6 months. | | | | more than 6,000 colleges, universities and |
| | | | technical schools participate in FFELP, which |
| Rates and interest Private student loan rates | | | | represents about 80 percent of all schools. |
| are lower than non-specialized private loans | | | | FFELP lending represents 75 percent of all |
| (e.g. "signature" loans) but slightly higher | | | | federal student loan volume. |
| than government loan rates. That may be | | | | |
| changing, as pending legislation would raise | | | | The maximum amount that any student can |
| government student loan rates to similar | | | | borrow is adjusted from time-to-time as |
| rates as private student loans. | | | | Federal policies change. A study published in |
| | | | the Winter, 1996 edition of the Journal of |
| Most private loan programs are tied to one or | | | | Student Financial Aid, titled “How Much |
| more financial indexes, such as the Wall | | | | Student Loan Debt is Too Much†|
| Street Journal Prime rate or the BBA LIBOR | | | | suggested that the monthly student debt |
| rate, plus an overhead charge. Because | | | | payment for the average undergraduate should |
| private loans are based on the credit history | | | | not exceed 8% of total monthly income after |
| of the applicant, the overhead charge will | | | | graduation. Some financial aid advisors have |
| vary. Students and families with excellent | | | | referred to the 8% level as “the 8% |
| credit will generally receive lower rates and | | | | rule.†Circumstances vary for |
| smaller loan origination fees than those with | | | | individuals, so the 8% level is an indicator, |
| less than perfect credit. Beginning a few | | | | not a rule set in stone. A research report |
| years ago, money paid toward interest is now | | | | about the 8% level is available on the |
| tax deductible. | | | | internet at Follow links to --> Reports and |
| | | | presentations --> How Much Student Loan Debt |
| Fees Private loans often carry an origination | | | | is Too Much? |
| fee. Origination fees are a one-time charge | | | | |
| based on the amount of the loan, they can be | | | | For private loans it is far simpler - the |
| taken out of the total loan amount, or added | | | | lender generally disburses the money directly |
| on top of the total loan amount, often at the | | | | to the school. More and more private loan |
| borrower's preference. Some lenders offer | | | | companies are offering so-called |
| low-interest, 0-fee loans; but these are | | | | 'direct-to-consumer' private loans. With |
| usually available only to those with high | | | | these products, loans are not certified by |
| credit scores of 800 or more. It is a fact | | | | the school, and the funds are disbursed |
| that each percentage on the front-end fee | | | | directly to the borrower rather than to the |
| gets paid once, while each percentage point | | | | school. |
| on the interest rate is calculated and paid | | | | |