STUDENT LOANS

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STUDENT LOANS

A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education. It also differs in many countries in the strict laws regulating re-negotiating and bankruptcy.

Income Based Repayment
The Income Based Repayment plan is an alternative to paying back student loans, which allow the borrower to pay back the loan, based on how much he/she makes, and not based how much money is actually owed. However, income based repayment does not apply to private loans.

Qualification
Most college students in the United States qualify for some type of student loan, although the amount they can borrow may vary based on several factors. Income level, parents’ income level, and other financial considerations are all weighed to determine the amount they are eligible to borrow under the federal student loan program.

Repayment
A student loan has major differences over conventional loans – 6% interest rates (higher than most home loans) and inability to negotiate. The interest rate on a student loan will generally be at least two percentage points lower than the going market rate for conventional loans, but this will vary somewhat.

Repayment typically begins anywhere from six to twelve months after a student leaves school, regardless of whether or not they complete their degree program. In some cases, repayment begins if course load drops to half time or less, so it is important to check the exact terms and conditions of any student loan.

The student may have multiple options for extending the repayment period, although an extension of the loan term will likely reduce the monthly payment, it will also increase the amount of total interest paid on the principle balance during the life of the loan. Extension options include extended payment periods offered by the original lender and federal loan consolidation. There are also other extension options including income sensitive repayment plans and hardship deferments. Extensions and consolidation will also add to the principal, many times unpaid interest and penalties become capitalized.

The Master Promissory Note is an agreement between the lender and the borrower that promises to repay the loan. It is a binding legal contract. Direct student loans can be obtained by filling out the government FAFSA form, and each school will determine eligibility of a student for direct federal loans.

Types of Student Loans
There are two main types of student loans: Federal student loans and private student loans. There are several types of federal loans, so let’s explore the options:

Federal Student Loans
Federal student loans have more favorable terms than private loans. The government sets a low, fixed interest rate, nearly all students are eligible to receive federal student loan money, and they feature a grace period after school during which no payments are due.

Stafford Loans: These loans are available to almost anyone who submitted a FAFSA, has a financial need as determined by the school, is enrolled at least half time.

There are two types of Stafford loans:

  • Subsidized Stafford Loans are need-based, and interest does not accrue on the loans while students are in school or during a six-moth grace period after leaving school.
  • Unsubsidized Stafford Loans are not need-based and students are responsible for all the interest that accrues on the loan, including they are in school.

The fixed interest rates on subsidized Stafford loans first disbursed between July 1, 2009 and June 30, 2010 is 5.6%. For the following 3 years, interest rates will be 4.5%, 3.4%, and 6.8%, respectively. All unsubsidized Stafford loans have a fixed interest rate of 6.8%.

Federal Perkins Loans: These types of loans are for students with the greatest financial need. It has a low fixed interest rate of just 5% and they share many of the characteristics of subsidized Stafford loans. In addition, they also include the advantages of not having fees and having a longer grace period.

Federal Parent PLUS loans: These loans are for parents of undergraduate, dependent students and can be used to fund the entire cost of a child’s education. The interest rates are a fixed 8.5%, so the other types of loans would be preferable, if available.

Private Loans
In addition to the federal loans, private loans may be available to cover the rest of the education costs for students. Those who will be taking responsibility for their loans without the help of their parents are the most likely candidates for private loans.

There are many companies that offer private student loans, with the major ones being Sallie Mae and Citi. Interest rates vary based on many factors, and lower rates go to those:

  • who have a higher credit score;
  • who have a co-signer;
  • who sign up for automatic debit payments;
  • Private student loans current has a variable interest rate of 3.25, which is very low. Over the next few years, that rate is likely to rise, but for now, I am very happy with it.

Institutional Loans

  • These loans are similar to private loans.
  • They are non-federal aid provided directly by your school.
  • Your servicer may be your school or an agency hired by your school.
  • Repayment options will vary, as will interest rates.
  • If you have institutional loans, contact your school to learn more about the terms of these loans.

 

Tips about Student Loans
The cost of going to college is getting more expensive each year and many young adults are taking out student loans to pay for their education.  Before you sign any papers for a student loan, here are some quick tips to keep in mind:

Complete the Free Application for Student Aid (FAFSA).
Completing a FAFSA helps determine for which federal assistance programs you qualify.  Some federal assistance programs, such as grants, give money that does not need to be repaid to students to pay for college, while federally guaranteed loans are low interest rate loans that must be repaid.  It is wise to borrow as much of your needed amount from federal sources first before borrowing from private lenders.  Learn about the benefits of federal student loans

Shop around and compare loan features. 
If you need to take out a private loan, compare agreements offered by lenders to see which one best fits your needs.  Questions to ask include:

  • What is the interest rate?
  • How often will the interest rate change?
  • When do repayments begin?

 

Check the loan amount to see if it’s right for you.
Many lenders factor in tuition and the cost of education expenses (books, school supplies, lab fees, etc.) to determine the loan amount.  Many times they will offer you a loan that is much more than you need to pay for a college education.  Work out a budget for yourself to determine how much of a loan you need, because borrowing too much means you’ll be paying more in interest in the long term.

Getting a cosigner may offer you a better interest rate.
Most people’s first major loan is their student loan and they usually have little or no credit established yet.  This means that the rates you would get for the loan are higher than for a person with a good credit rating.  One way to get a better rate on your student loan is to find a cosigner with a good credit rating (such as a parent or close relative).  A cosigner shares responsibility for the loan with you, and both of your credit histories will be impacted.  Please keep in mind that your cosigner is responsible to pay the debt if you fail to pay the loan.

Avoid “free money” from organizations you don’t know.
Many scam artists prey on students and parents with little or no credit with offers of loan money without a credit check.  Please remember: “If it sounds too good to be true, it probably is.”  If a company offers to give you money for college but you didn’t request the information or you’re unfamiliar with the company, it could be a scam to steal your money.