Student loans

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