When to apply for student loans?
Save your money, and ask the financial aid counselor at your prospective college and university about loans available to you.
With the cost of college education increasing every year, more students and their families turn to student or parent loans to bridge the gap when savings and grants and scholarships cannot pay all of the education bills. For most young Americans, a student loan is their first encounter with major debt.
Federal Perkins Loan
The federal government provides colleges and universities with Federal Perkins Loan program funds for students with exceptionally high financial need with Pell Grant recipients having top priority. Perkins Loans are awarded to undergraduate, graduate, and professional students who are enrolled at least half time.
Eligible undergraduates can qualify for up to $4,000 each school year under the Perkins Loan program. The loan cap is $20,000 during an individual's undergraduate degree program. Graduate students are eligible to receive up to $6,000 per year in Perkins Loan assistance, with a lifetime cap of $40,000 including undergraduate loans.
Students must begin to repay Perkins Loans to their institutions nine months after they graduate or drop below half-time enrollment status. Loan recipients can take up to ten years to repay loans at a fixed 5% interest rate.
If you receive a Perkins Loan, your loan amount will probably be credited to your school account in equal installments, one for each term, to pay tuition and fees, room and board, and other educational costs. Unlike personal loans that fluctuate with the prime rate, Perkins Loan recipients enjoy the stability of the same interest rate throughout their repayment period. Graduates can save a significant amount of money by paying off their Perkins Loans early because there is no pre-payment penalty.
Federal Family Education Loan or Direct Stafford Loans
The United States Department of Education administers two Stafford Loan programs--the Federal Family Education Loan (FFEL) program, for which private lenders provide the funding and the William D. Ford Direct Loan program, for which the federal government provides the funding. Both programs allow students to borrow money for college. The government pays the student's interest while students are enrolled at least half time in a degree program. Because interest compounds over time, these modest federal subsidies can shave thousands of dollars from interest charges over the life of the loan. Eligibility for Stafford Loans is based on financial need. The government stops making interest payments to the lender six months after a student graduates or leaves school. At that time, students must begin making monthly payments of both interest and principal.
Unlike Perkins Loans, the interest rate on new Stafford Loans for undergraduate students is fixed at 6.0 oercent for 2008-09, and 5.6 percent, 4.5 percent, and 3.4 percent for the next three award years, returning to 6.8 percent in 2012-2013. Students can save the most money on their education expenses by paying back the loan principal as quickly as possible. The interest rate for Stafford Loans for graduate students is fixed at 6.8 percent. Borrowers in the military as of August 14, 2008 should contact their lender to find out if they are eligible to have their Stafford Loan interest rate reduced.
Students who do not qualify for a subsidized Stafford Loan can still participate in the government's loan program by borrowing an unsubsidized loan. As the name suggests, the unsubsidized loan does not carry the benefit of having the government pay the interest while a student is enrolled.
Whether or not a student qualifies for a subsidized loan, he or she must adhere to some government-imposed borrowing limits during their academic careers. Dependent students can borrow the following annual Stafford Loan amounts:
- $3,500 in the first year
- $4,500 in the second year
- $5,500 in each subsequent year
Dependent students can incur no more than $23,000 in Stafford Loan debt as an undergraduate.
Independent students are eligible to borrow the following annual amounts in both subsidized and unsubsidized Stafford Loans:
- $7,500 ($3,500 subsidized + up to $4,000 unsubsidized) in the first year
- $8,500 ($4,500 subsidized + up to $4,000 unsubsidized) in the second year
- $10,500 ($5,500 subsidized + up to $5,000 unsubsidized) in subsequent years
As an undergraduate, independent students can borrow no more than $23,000 in subsidized Stafford Loans with a total borrowing limit of $46,000, which includes unsubsidized loans.
Graduate students also take advantage of federal student loan programs because fewer scholarships and grants are generally available to help pay for advanced degree programs. Graduate students can borrow up to $20,500 each year. Of that amount, only $8,500 can be in subsidized Stafford Loans. The Stafford Loan program for graduate students caps out at $138,500 (only $65,500 in subsidized loans), which also includes any loans disbursed during a student's undergraduate program.
Stafford Loans provide some tax benefits to students after graduation because they can claim the interest paid on their student loan debt, with a maximum $2,500 tax write-off each year.
Federal PLUS Loans
Parents of dependent students and graduate and professional students can borrow from the PLUS loan program directly from the government through the Direct Loan program (if the school participates), or from private lenders through the FFEL program. The interest rate for FFEL PLUS loans is 8.5 percent and for Direct PLUS loans is 7.9 percent. Applicants must not have an adverse credit history. Applicants who have an adverse credit history may still be able to receive a loan by documenting extenuating circumstances or obtaining a co-signer.
Both parent and student PLUS loan borrowers can borrow up to the total cost of attendance minus any financial aid received. To apply for a PLUS loan, parents of dependent students are encouraged to file a Free Application for Federal Student Aid (FAFSA) and graduate and professional students are required to file one.
PLUS loan funds are first applied to the student's account to pay tuition and fees, room and board, and other expenses. For parent PLUS loans, any funds that remain are sent to the parent borrower; for student PLUS borrowers, any funds that remain are given to the student. All loan funds must be used for educational expenses. Unlike Stafford Loan borrowers, PLUS borrowers must begin repayment of PLUS loans immediately. For parent PLUS loans disbursed after July 1, 2008, the borrower can choose to defer repayment while the student is enrolled at least half time and for a 6-month period after the student is no longer enrolled (either because they graduate or leave school). The parent borrower must either make interest payments during these deferment periods or the accrued interest is capitalized (added to the principal).
Applying for Student Loans
All federal student loan programs use the FAFSA, which can be completed online or on paper. Remember, it does not cost anything to apply for student loans. Some unethical businesses attempt to charge a fee to "uncover" loan opportunities for unwitting families. The administrators of federal loan programs emphasize that this practice can be considered a felony in most states.
Save your money and ask the financial aid counselor at your prospective college or university for assistance with any questions. They will be delighted to assist you.
Falling Behind on Student Loan Payments
Other creditors, like credit card companies or past landlords, will often hound you with phone calls, letters, and harsh collection agencies if you miss your payments. Falling behind on your student loan payments can lead to even worse punishment. Failing to repay a student loan reduces your credit score more than just about any single act short of bankruptcy. A student loan in default can disqualify you from receiving federal aid and some of life's essentials like having a checking account or applying for auto insurance.
Worst of all, defaulting on your student loan can exclude you from government hiring processes, as well as schools and law enforcement agencies. Many private employers also reject job applicants with a defaulted student loan on their records.
Fortunately, the Department of Education provides significant relief to student loan recipients who, through no fault of their own, cannot meet their regular monthly payments. By law, you can request up to twenty four months of "forbearance" by simply contacting your lender and completing a simple form. During the forbearance period, you can skip your student loan payments while you work on getting a new job or putting your financial house in order.
Many student loan recipients who wind up in default say they were too scared or embarrassed to ask for help during hard financial times. In fact, the process is simple and painless. Lenders have no problem extending forbearance because they keep charging interest on your remaining balance during the forbearance period. If you default on your loan, government insurance programs reimburse them for a large portion of their loss.
Therefore, the government requires loan recipients to repay their obligations over time, no matter what. Student loans can not be discharged in bankruptcy, nor can they be discharged like other forms of unsecured debt. Department of Education officials routinely garnish up to twenty five percent from the wages of defaulted loan recipients. You can avoid these consequences by simply asking for help when you run into trouble.
You can also receive a deferment if you re-enroll in school at least half time, are unemployed and cannot find full-time employment, or are experiencing economic hardship or working in the Peace Corps. Deferments are also available for active military duty. Contact your lender for details.
Student Loan Forgiveness
Fortunately, you can actually earn full forgiveness (cancellation) of your student loan by participating in any number of state or federal loan forgiveness programs. For example, education majors who commit to teaching in underserved areas can often have their loan slate wiped clean after as few as eighteen months of service.
Traditionally, military personnel can eliminate their student loan debt by participating in active military duty after graduation. Depending on your area of study, your college or university should be able to inform you about specific opportunities to wipe out your student loan debt while earning valuable career experience.
Finding More Information Online
- The Student Guide to Federal Student Aid - this official United States Government resource for prospective students offers a free, downloadable handbook to all federal student loan programs.