After receiving federal and state sponsored financial aid, grants, scholarships, and money from college savings plans, many students are still unable to meet the rising cost of college. Student loan programs, funded by the federal government, state government, or private lenders, can help students and their families borrow money to help with educational costs. Read on to learn what is available for your situation.
The Stafford Loan program is the largest source of government financial aid available to undergraduate and graduate students. There are two types of Stafford Loans the William D. Ford Direct Loan Program, referred to as the Direct Loan Program (FFDL), and the Federal Family Educational Loan Program, commonly referred to as the FFEL Program. Both have the same eligibility requirements and differ only in the source of funding and payment options. The Direct Loan Program offers student and parent loans with funding directly from the federal government. The FFEL Program (referred to as Stafford Loans or Federal Stafford Loans) receives its funding from financial institutions, such as banks, credit unions, or a savings and loan. Schools participate in either the FFDL or FFEL program. Regardless of which program the school uses, the eligibility criteria for loans are the same. The main difference is the funding source. For the purposes of this section of the book, any reference to “Stafford Loans” refers to loans from the Direct Loan Program or the FFEL Program, unless specifically stated otherwise.
Stafford Loans can be further identified as subsidized or unsubsidized. Subsidized Stafford Loans are based on financial need; the federal government pays interest on the loan until six months after the student ceases being enrolled at least half time and begins payment on the account. Unsubsidized loans do not have financial requirements and begin to accrue interest as soon as the loan is disbursed.
The amount of money available is substantial. Students can borrow anywhere from $2,625 to $18,500 annually, depending on their academic year of study. (Note: In July 2007, these amounts will increase to $3,500 to $20,500, respectively.) Interest rates are fixed at 6.8 percent annually. [Note: In the past, an origination fee (a certain percentage of the loan) was charged by the government or the lending agent to help with the cost of the loan. Through July 1, 2006, a maximum 2 percent fee will continue to be charged for the FFEL. The percentage will gradually decrease until July 1, 2010, when it is completely eliminated. Although, FFEL lenders have the option of charging a lesser fee, many FFEL lenders are waiving the fees entirely. A 3 percent fee will be charged for the FFDL through July 1, 2007. The percentage will gradually decrease until July 1,2010, when it becomes fixed at 1 percent. Loan disbursements, which are generally made twice an academic year, are made directly to the school to pay for charges on the student’s account. These charges could be tuition, fees, room and board, books, or other charges the student may be able to put on the account. (Note: Students who are enrolled for just one semester typically receive a one time disbursement.) Any remaining funds can be paid to the student for other educational expenses, or kept on account for the next academic year. However, the student must provide the school with authorization to keep a refund on the account for future charges.
Students have 10 to 30 years to pay Stafford Loans. Deferment may be granted if the student can prove certain situations such as enrollment at approved secondary school programs (at least half time status), approved fellowships, or unemployment. Participation in a volunteer or work program after graduation can cancel a portion of a Stafford Loan. Visit http://studentaid.ed.gov/students/ publications/student_guide/index.html or http://www. staffordloan.com for more information.
Two Federal PLUS Loans are available: the Parent PLUS Loan and the Graduate PLUS Loan.
Parents can seek financial assistance with a Parent PLUS Loan. This is an unsubsidized loan. Parents must pass a credit check and have a dependent child enrolled at least half time at an approved college or university. There are two types of Parent PLUS Loans similar to the Stafford Loan: Direct PLUS Loans and Federal Family Education Loan Program (FFEL) Plus Loans. Each loan is identical in its requirements, interest, and repayment options; only the lending house differs. Parents can only apply for either a Direct PLUS Loan or a FFEL PLUS Loan, but not to both. However, similar to the Stafford Loan programs, the college will choose to participate in the Direct Loan Program or FFEL Program, and parents must apply for a Parent PLUS from the program the school uses.
Applicants who have trouble passing the credit check requirements can still qualify for a PLUS Loan with the help of a guarantor or endorser. The total loan amount peaks at the full tuition cost, minus any other funding from other sources loans, grants, and scholarships. The interest rate for PLUS Loans is fixed: 8.5 percent for FFELP PLUS Loans (that are provided by banks) and 7.9 percent for Direct PLUS Loans (that are provided by the federal government). (Note: there is a chance that federal legislation may standardize these interest rates; check with your financial aid counselor about the latest legislation regarding interest rates.). A fee, up to 4 percent of the total loan, is charged to help with the cost of the loan. Interest on the loan begins as soon as the first disbursement payment is made; parents have 60 days to begin payment after full disbursement. PLUS Loan disbursements are made directly to the school in two payments. The first is applied to tuition, room and board, and fees; the other is allotted to other educational expenses. Any remaining funds can be received by the parents, endorsed to the student, or kept on account for the next academic year. For more information, visit http://stu-dentaid.ed.gov/students/publications/student_guide/2006-2007/index.html or http://www.parentplusloan.com.
Federal Graduate PLUS Loan are available to graduate students with an acceptable credit history. Graduate students may borrow funds up to the total cost of their education (minus any financial aid received). Applicants must be enrolled at least half time and U.S. citizens or nonciti-zen permanent residents. The interest rate for Graduate PLUS Loans is fixed at 8.5 percent. A loan origination fee and a guarantee fee may be charged. Contact your loan provider for more information.
Students with financial hardship may take out a low interest Perkins Loan. The school acts as the lender for this loan, using funds appropriated by the federal government, with a share coming from the school itself. Undergraduates may borrow up to $4,000 a year and graduate students up to $6,000 a year at 5 percent interest. There is no fee to apply for this type of loan. Funding for this program is awarded on a first-come, first-served basis, so it is important to apply for this loan early. Funds are disbursed twice yearly, either directly to your school accounts, or sent to you in the form of a check. (Note: Students who are enrolled for just one semester typically receive a onetime disbursement.)
Students are given up to 10 years to repay a Perkins loan, with the first payment due within nine months after the student ceases to be enrolled at least half time. Depending on the circumstances, a deferment or forbearance may be granted. Interest will continue to accrue, without the monthly payments. Perkins loans may be cancelled if the student agrees to participate in work or volunteer programs after graduation. Visit http://studen-taid.ed.gov/students/publications/student_guide/index. html for more information on Perkins Loans.
There are also funds available from FFELP-participating state guaranty agencies. For example, the Illinois Student Assistance Commission (ISAC) offers numerous financial aid packages to in-state students, as well as college savings plans and prepaid tuition plans. If you live in Illinois, visit http://www.collegezone.com for more information on available financial aid available from the ISAC. To find available educational loans in your home state, log on to the U.S. Department of Education’s Web site, http://wdcrobcolpOLed.gov/Programs/EROD/org_list. cfm?category_cd=SGA, for links to your state’s guaranty agency. (Note: Not all states offer loan programs; check with your state’s department of education or student assistance commission for details.)
After receiving grants, scholarships, and the maximum federal and state sponsored loans available to them, students may still fall short of the funding needed to finance a college education. In these cases, they may want to apply for a private student loan, also known as alternative education loan. Eligibility requirements such as past credit history, U.S. citizenship or permanent residency status, school, or field of study can also affect assigned interest rates and fees. Since these loans carry higher interest rates and fees, some of which change during the grace period vs. the repayment period, students should consider private loans only after exhausting other financing options. Use the Internet to search for private loan programs, or ask your school’s guidance office for help in acquiring the perfect loan for your needs. Here are some available programs:
National Education Loan Network
The National Education Loan Network (NelNet), offering private and federal loans, as well as consolidation loans, is one of the country’s largest lenders with about $3 billion in student loan programs. It offers undergraduates up to $120,000; graduate students, $180,000; with no limit loans for students enrolled in medical or other health care studies. NelNet loans allow 20 to 25 years for repayment, depending on the loan type and amount. For more information, visit http://www.nelnet.net.
SallieMae is a major provider of all types of educational loans federal, private, and consolidation loans. This company currently owns or manages 9 billion student loans. Qualified students can borrow anywhere from $100,000 to $220,000 depending on their status, field of study, and chosen institution. Loans carry a variable interest rate, with a fee based on 0 to 6 percent of the total amount borrowed. Borrowers have 15 to 20 years to repay their loan. One program offered by SallieMae is the Community College Loan, available for students pursuing an associate degree or Title IV certification program. A minimum of $1,000 up to the total cost of tuition, less other aid money, is available for qualified students. For more information, visit http://www.salliemae.com.
APPLYING FOR A STUDENT LOAN
Your first step in applying for a federal student loan is completing the Free Application for Federal Student Aid (FAFSA); information given on the FAFSA will generate a Student Aid Report (SAR). The academic institution uses the student’s SAR information to determine the loan amount. The FAFSA, and personal identification number application, can be submitted online or in hard copy format. Completing a FAFSA is important, even if you are not anticipating a federal loan, since many state agencies and schools consider FAFSA and SAR information when allotting funding. Note that a FAFSA must be submitted annually. Also, keep aware of pressing deadlines since some federal dollars (Perkins Loan, Federal Supplemental Educational Opportunity Grant) are limited and there aren’t always enough funds to provide an award to all eligible applicants. Once the budget is spent, you’ll have to wait until next year, or find funding elsewhere.
IT’S TIME TO PAY…
Payment arrangements depend on the type of loan. Some loans stipulate that payment begins after the first disbursement; others hold off payments until a short time after graduation, but begin to accrue interest on the principal until then. Some loans do not accrue interest until after graduation. Payments on a loan are done on a monthly basis; arrangements can be to receive a monthly statement, automatic withdrawal from a checking account, or online payment. Be aware of all details some private loans carry a penalty if a loan is paid off ahead of schedule.
CANCELING A LOAN AND LOAN FORGIVENESS
Some students are able to cancel certain loans or earn money towards educational expenses by participating in work or volunteer programs or other opportunities. Any funding received is considered taxable income for that particular year. Here are a few options to consider if you would like to cancel a loan or seek loan forgiveness:
Service in AmeriCorps is one way to earn college money. The network of AmeriCorps volunteers works with a variety of nonprofit organizations, public agencies, and faith-based groups to provide educational and health assistance, public safety, and environmental duties. Eligible volunteers can receive up to $4,725 for one year of AmeriCorps service to pay college tuition and other educational expenses at an accredited school or certification program. Part time AmeriCorps volunteers are eligible to receive partial funding. The money can also be designated to pay off qualified existing student loans most federal and state loans, except PLUS loans. Payments are made directly to the school or lender and are considered taxable income. Visit http://www.americorps.gov/about/ac/ index.asp for more information. Also, you can search the Internet for other similar volunteer programs.
A tour of duty with the armed forces, active or reserve, can help you earn educational funding. Here are some examples:
– The Montgomery GI Bill Active Duty (MGIB AD) offers up to 36 months of educational benefits for full time students enrolled in an accredited college or university. Eligibility includes completion of at least two years of active duty in any branch of the U.S. military (or four years in the Selected Reserve), or an honorable discharge. Applicants must also have a high school diploma, GED, or in some cases 12 hours of college credit, and have made a monthly contribution into the program for 12 months during service. Don’t wait too long to take advantage of these funds the MGIB AD is available only up to 10 years after formal separation from military service. Visit http://www.gibill.com or http:// www.gibill.va.gov for more details.
– The Survivors and Dependents Educational Assistance Program is available to dependents of U.S. veterans who have died or were disabled during service, are currently detained by a foreign power, or identified as missing in action. Eligibility requirements depend on the relationship to the veteran. Visit http://www. gibill.va.gov/pamphlets/CH35/CH35_Pam-phlet_General.htm for complete details.
Teachers working full- or part time can cancel a portion, 15 to 30 percent, of their Perkins or Stafford Loans. The total amount of forgiveness depends on the length of service a minimum of one year, with the largest amount awarded to teachers serving at least five years. Schools must serve elementary or secondary students from low-income families. Learn more by visiting the Web site (http://www.aft.org) of the American Federation of Teachers.
Heal or Advise
Health and legal professionals can also participate in a variety of loan forgiveness programs located throughout the United States and abroad. Many of these programs require doctors, nurses, therapists, and lawyers to practice in underserved, rural communities or economically disadvantaged areas. Visit the American Association of Medical Colleges Web site, http://www.aamc.org/stu-dents/financing/repayment/start.htm, to find a medically geared loan repayment program, or the Web site (http:// www.equaljusticeworks.org) of Equal Justice Works for more information.
What is a consolidation loan? It’s a total or partial combination of student loans into one new loan, regardless of lender or original loan type. The benefit of consolidating students loans is twofold: the convenience of one monthly payment and, in most cases, a much lower interest rate. Student loans may be consolidated using loans from the federal government or state guaranty agencies. Visit http:// loanconsolidation.ed.gov/borrower/bapply.shtml for more information on Federal Direct Consolidation Loans.
Defaulting on a Student Loan
Some students have difficulty paying their student loans due to unemployment, sickness, or an unfinished degree. This poses serious consequences that may be irreversible. A defaulted student loan is sent to a collection agency, which will make every effort to collect. Collection methods include garnishing wages and withholding Social Security benefits or income tax refunds. Professionals such as doctors, nurses, and lawyers will be denied re-application for licensure. The most serious, and hardest to correct, is the black mark a defaulted loan will place on your credit history. Is it worth it? For information on how to avoid default, or ways to correct a defaulted loan, please visit http://www.ed.gov/offices/OSFAP/DCS/ index.html.