With the average cost of a higher education increasing, families often find that they need assistance to pay for their children’s education. If a student does not qualify for scholarships or grants, the next source for funds is an education loan. Currently, more than 50% of financial aid comes in the form of loans.
Different types of loans are available to fund a college education. Some loans are need-based loans and are made to families that demonstrate financial need. Other loans are designed to pay the family’s share of the cost of school. Need-based loans usually have better interest rates than those that are not need-based.
Federal Loans
There are three types of Federal Student Loans: Perkins loans, Subsidized Stafford loans, and Unsubsidized Stafford loans.
Perkins Loans
This is a low-interest loan that is made to undergraduate and graduate students with extraordinary financial need. The school the student attends is the lender; therefore, the student repays the school. Different amounts can be borrowed depending on the student’s status of a graduate or undergraduate. The following are the limitations on the loan by status:
Graduate:
Can borrow up to $6,000 per year (total amount that can be borrowed is $40,000)
Undergraduate:
Can borrow up to $4,000 per year (total amount that can be borrowed is $20,000)
There are no charges with this type of loan, unless a payment is missed or is late. Repayment begins nine months after graduation, after the student leaves school, or drops below part-time status. Students may have up to 10 years to repay the loan.
The school initially receives Perkins loan money from the government, then establishes an account for the student. The school sends the student a promissory note to sign and return to the institution.
Stafford Loans
Stafford Loans are the most common federal loans to both graduate and undergraduate students. There are two variations Subsidized and Unsubsidized Stafford Loans. The main difference between these types of loans are whether its needed financially and how the interest accrues. Students must show financial need and must apply for a Pell Grant before they are eligible for a Subsidized Stafford Loan. All students are eligible for an Unsubsidized Stafford Loan.
Subsidized Stafford Loan
With a Subsidized Federal Stafford Loan, the government pays the interest while the student is in school. The student must be enrolled at least part-time to receive the loan. The applicant must be a U.S. citizen or resident alien.
Unsubsidized Federal Stafford Loan
With an Unsubsidized Federal Stafford Loan, the student is responsible for the interest until the loan is paid in full. However, interest payments can be deferred until after graduation. Interest payments are added to the loan balance, increasing the size and cost of the loan. The student applying for the loan must be a U.S. citizen and must have applied for a Pell Grant and a Subsidized Federal Stafford Loan before applying for this type of loan.
The repayment of Stafford loans begins six months after the student graduates, drops out or is no longer considered a part-time student. The interest rate and terms for Stafford Loans can vary depending on whether the loans are subsidized or unsubsidized. Even if a student does not qualify for a subsidized loan, they can receive an unsubsidized loan; however, they will be accruing interest even though it does not have to be repaid until they graduate.
There is a lifetime limit, combining Subsidized and Unsubsidized Stafford Loans, of $138,500 per student.
Stafford Loan Maximum Amounts:
• Freshmen – $3,500 dependent, $7,500 independent
• Sophomore – $4,500 dependent, $8,500 independent
• Junior or later – $5,500 dependent, $10,500 independent
• Graduate or Professional Degree – $20,500 per year for either type of student
For Undergraduates the maximum amount that can be borrowed depends on the dependency status and if the parents are eligible to borrow under the Federal Plus Program.
If the student is a dependent and the parents qualify for a Federal Plus Loan, the dependent amounts apply.
If the student is independent or the parents of the dependent do not qualify for a Federal Plus Loan, then the independent amounts apply.
Student Loans
Private Lenders
Private institutions often award loans to students to pay for college education. These loans are called Signature Loans. The student borrowing the funds must have a good credit rating in order to receive the loan. Interest rates vary according to the student’s credit rating. If the student has excellent credit, then the interest rate is Prime plus 0.5%, good credit rating is Prime plus 1%, and fair credit rating is Prime plus 2%. The term is between 15 and 25 years.
These loans are available to graduate students, as well as undergraduates. The student must attend a four-year or five-year college to be eligible. The maximum amount that can be received is the total cost of college, less any financial aid received. The maximum amount that can be borrowed is $100,000.
Repayment of the loan starts six months after graduation or if the student’s status drops below part-time. The loan is paid directly to the institution the student is attending.
For more information on student loan lenders call 1(800) 831-5626.
College Sponsored Loans
Some colleges have their own loans that are available to students. The student should contact the school’s financial aid office to inquire if the institution they are attending offers loans.
Other Loans
Some private organizations and foundations have loan programs in addition to scholarships. To inquire about this type of loan, go to http://www.scholarships.com. These loans are available to both parents and students.
Parent Loans
Federal Plus Loans
This federal government sponsored loan is available only to parents of undergraduate students. The student must be enrolled in college at least as a part-time student. The borrower must be a U.S. citizen or resident alien and have a good credit rating. Interest is variable and adjusted annually by the Department of Education.
The maximum amount that can be borrowed is the cost of college, less the amount of financial aid being received.
Repayment of the loan begins 60 days after the borrower receives the first payment.
Two informative websites to visit regarding paying for and the cost of college are:
For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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