Student Loans

Why Apply for Federal Financial Aid?

For many college students, financial aid seems like a complex subject. Just like filing income tax returns, people dread the confusion of paperwork and deadlines. But try to remember what you effort is worth: free money. In fact, an afternoon's worth of online forms can equal thousands in cash for your college education.

According to the College Board's 2008-09 "Trends in Student Aid" report, over $180 billion in student aid was distributed through government funds, college funds, private funding sources, and federal tax credits. Currently, the Obama administration is working to ensure that the aid application process gets simpler and that the student need-analysis formula is clearer.

Still, some students aren't willing to do their federal aid homework. And it's costing them money. In 2007, 65% of undergraduates took no federal Stafford Loans, even though some were entitled to receive those federal funds. Instead, many borrowed from non-federal sources, like private banks and lenders. Unfortunately, the interest rates on private loans are higher, and repayment protections are fewer.

If you're heading back to college, read up on the following sources of federal aid. You might be surprised by how much funding you can receive.

1 What Are the Different Types of Federal Loans?
PLUS Loans

PLUS is an acronym for Parent Loans for Undergraduate Students. The PLUS loan is available to the parent of a dependent student. (If your parents don't claim you as a dependent on their tax return, you are not a dependent student.) The Graduate PLUS Loan is available to graduate students, pursuing master's or doctoral degrees, who are enrolled at least half time. The interest rate for Federal Direct PLUS Loans for the parent of a dependent student is 7.9% through July 1, 2010. For graduate and professional degree-seeking students, the Grad PLUS rate is 8.5% through July 1, 2010.

Stafford Loans

Stafford Loans are federal loans that are available to undergraduate and graduate students. These loans can be need-based (subsidized) or non-need based (unsubsidized.) You will pay a fee of up to 4% of the loan, which is usually taken from the disbursed amount you receive. The interest rate on Stafford loans varies depending on the type of loans you received and when you borrowed.

FFELP

Federal Family Loan Education Program whereby Stafford and PLUS loans are financed by a private lender, such as Sallie Mae, but backed by the federal government. Students work with their school and the bank to secure the loan.

Direct Lending: William D. Ford Federal Direct Loan Program Stafford and PLUS loans are available directly from the federal government, not through a commercial lender. Students work with their school in securing the loan.

NOTE! Beginning July 1, 2010, all federal student loans will be through the William D. Ford Direct Student Loan Program. Stafford loans through the Federal Family Education Loan Program disbursed before July 1, 2010, will stay with the associated lender unless the student consolidates the loan, upon repayment, into the Direct Lending program. All colleges are required to eliminate the FFELP program effective July 1 and participate in the Direct Lending program.

Subsidized Stafford Loan (Need-Based)
- No interest charged while borrower is enrolled in school at least half-time, nor during grace or deferment periods. Interest on the loan begins with repayment.
- Interest Rate: 5.6% for loans made July 1, 2009 and before July 1, 2010 to undergraduate students. The graduate/professional degree rate is 6.8% through July 1, 2010.
- Fee: 1.5% of the loan (deducted proportionately from each loan disbursement.) for loans disbursed between July 1, 2009 and June 30, 2010.
- Note: if you fail to make your scheduled loan payments, you may be charged collection costs and late fees.
Federal Unsubsidized Stafford Loan (Non Need-Based)
- Interest accrues while in school; the borrower is responsible for paying the interest at all times. You can choose to make quarterly interest payments while in school by contacting the Department of Education.
- Interest Rate: 6.8% fixed for loans first disbursed after July 1, 2006.
- Fee: 1.5% of the loan (deducted proportionately from each loan disbursement.) for loans disbursed between July 1, 2009 and June 30, 2010.
- Note: if you fail to make your scheduled loan payments, you may be charged collection costs and late fees.
Perkins Loans

Perkins loans are low-interest loans for exceptionally needy students. They are funded by the federal government and awarded by your college. Perkins Loans are repayable over a period up to 10 years, depending on the amount owed. They can be used for undergraduate or graduate study, and you do not have to be enrolled full-time to be eligible. The interest rate is currently 5%. You would repay the loan to the awarding college.
2 Who Qualifies to Receive Federal Loans?
The U.S. Department of Education provides detailed information on eligibility, including special restrictions and provisions for students who have had criminal convictions or are incarcerated. Even if you don't think you qualify for federal grants, you should still complete the FAFSA form. You may qualify for other types of aid, and your college will use the FAFSA report to help you identify your options.

Basic eligibility requirements state that students must:
- Demonstrate financial need (except for certain loans).
- Have a high school diploma or a General Education Development (GED) certificate, pass a test approved by the U.S. Department of Education, meet other standards your state establishes that the Department approves, or complete a high school education in a home school setting that is treated as such under state law.
- Be working toward a degree or certificate in an eligible program.
- Be a U.S. citizen or eligible non-citizen
- Have a valid Social Security Number (unless you're from the Republic of the Marshall Islands, the Federated States of Micronesia, or the Republic of Palau).
- Register with the Selective Service if required. You can use the paper or electronic FAFSA to register, you can register online, or you can call 1-847-688-6888. (TTY users can call 1-847-688-2567.)
- Maintain satisfactory academic progress once you are in school.
- Not be in default on a federal student loan and not owe money on a federal student grant.
- Certify that you will use federal student aid only for educational purposes.
3 How Do You Apply for and Receive Federal Aid?

The only way to apply for and receive the funds listed above is to complete a FAFSA application. FAFSA stands for Free Application for Federal Student Aid. The application is available online, and it's free to complete.

Based on the information you supply about your income and your financial responsibilities, the government will determine how much college tuition you can fairly be expected to pay. Using that figure, your college's financial aid office will help you review which scholarships, loans, and grants are available to you.

For more information on how to complete the FAFSA form, read our FAFSA article or visit the FAFSA Web site.
4 Why Apply for a Private Loan?

If you have explored all of your financial aid options at the federal and state levels, you may want to consider a private loan. Private loans make up about 13 percent of all student loans. Also called alternative or non-federal loans, private loans are not sponsored by government agencies. Private loans are awarded through banks, non-profit organizations, and other financial institutions.

Private loans are unsecured, meaning no collateral is required. Interest rates are typically higher than federal loan rates, but competitive when compared to paying for school on your credit card. Eligibility for private loans generally depends on your credit score.
5 How Do You Apply for a Private Loan?

You do not need to complete the FAFSA in order to apply for a private loan. Most private loan applications are offered online, through the lender's Web site. Lenders determine your eligibility just by accessing your credit history. So private loans can often be secured fairly quickly.

If you don't have an established credit history or a high credit score, your approval rating and interest rate will be better with an approved co-signer. (A co-signer is someone who agrees to be responsible for your loan payments if you ever default on them.)

Unlike federal aid, the private loan application process is not tied to deadlines. How and when you receive the private loan disbursement will depend on your school and the lender who approves you.
5 How Common Are Private Loans?

Many students rely on private loans to help them meet the cost of their full tuition. Federal loans rarely cover the entire amount of a college degree, and it's not uncommon for students to seek additional sources of aid. That said, students should remember that private lenders are often in business to make money. It's up to you to borrow responsibly and proportionately — meaning that the cost of your college program should not grossly overshadow your income potential upon graduation.

In 2008-09, private loans totaled only 13 percent of the $95 billion in student loans that were awarded (College Board, Trends in Student Aid 2009). Private loans are becoming less prevalent than they once were, due to federal subsidy cuts and federal regulations which have forced many private lenders out of business. Today, colleges are limited in their ability to refer private lenders, and schools must be able to defend any preferred lender list that they offer.
6 Why Are Private Student Loans Less Desirable Than Federal Loans?
For one thing, private loans are usually tied to variable interest rates, whereas federal loans offer fixed interest rates. Federal loans' fixed interest rates are usually lower, and they're a definite number — meaning they don't have the potential to rise. Over many years of repayment, a private loan might end up costing you a lot more than a federal loan for the same amount.

For another thing, federal loans offer more flexible repayment plans and certain loan forgiveness programs. It may be easier to defer a federal loan, and penalties for defaulting may be less severe.

Critics of the private loan industry feel that some lenders take advantage of uninformed students. Some rely on heavy marketing tactics, lack of awareness about federal loan options, and a lack of consumer protections. The result? Students don't always receive the best education loans available.

The revised federal Truth in Lending Act (TILA), effective February 14, 2010, requires that students are given full disclosure of private educational loans, including interest, application, and repayment information. Also, students must now sign a self-certification with the lender before a private loan can be certified by the college.

Remember, because of TILA, the following information should all be available. But before you sign on the dotted line, ask:
- Can the loan be approved without a co-signer?
- What are the interest rates with or without a cosigner?
- Can repayment of the loan be deferred while in college?
- How is the interest calculated in both deferment and repayment?
- Are there fees?
- Are there any repayment incentives?
- What will the total cost of the loan be in repayment?
- Can I repay the loan early without any penalty?