If you still have a gap in funding your education after applying for federal aid, state aid and scholarships, the next option is student loans. The number of loans taken out by students over the last ten years has expanded ten-fold. During this period dating back to 2008 when financial meltdowns began to take place, a large number of student loans became delinquent or simply went into default status. The decision to apply for a student loan has to be carefully weighed. It may be necessary to pursue a student loan because other resources are not available. If one has to borrow money to attend college, it should be done with careful and deliberate consideration. Fortunately, federal loans are the primary source of student loans, and they turn out to be the best source.
Why Federal Student Loans?
Because of that source, the Federal government is the largest source of student loans. Additionally, Federal student loans typically offer the borrower lower interest rates and have more flexible repayment options than loans from banks or other private sources.
What Are They? How Do They Work?
Each student loan program has its own unique characteristics. It’s those characteristics that you need to focus attention upon so that your financial needs are met. Below is a break down of the general types of federal student loans:
Perkins loans are the most common and widely used among the different federal loan programs. If you are an undergraduate or graduate student enrolled at least part-time and can demonstrate a need for financial aid you will likely be able to obtain a Perkins loan. You will be able to partly certify your need for financial aid as a result of your Student Aid Report (SAR). The SAR is generated after a complete and correct filing of the FAFSA document. As an undergraduate student, you can currently borrow up to $5,500 per year. As a graduate student, you can borrow up to $8,000 per year. The best source of information on whether you qualify, and if you do, how much can you borrow can be found at the Financial Aid Office of the college you plan to attend.
Stafford loans are categorized in two parts to met the particular needs of the student:
Part 1 – Direct Subsidized
If you are an undergraduate or graduate student enrolled at least part-time, and can demonstrate a need for financial aid, you are likely eligible to obtain a Stafford Direct Subsidized Loan. The reason the loan is referred to as “subsidized” is because it is disbursed at a lower interest rate than the typical market rate. Currently the interest rate is 3.4%. A student can borrow between $3,500 and $8,500 annually. Contact the Financial Aid Office at your college for information on how to apply for the direct subsidized loan.
Part 2 – Direct Unsubsidized
The qualifications for borrowing under the Direct Unsubsidized loan program are the same as the subsidized program-with one major exception. You do not have to demonstrate a need for financial assistance. Another difference is the higher interest rate on the loan. The current interest rate is 6.8%. A student can borrow up to $20,500 annually. The Financial Aid Office at your college can provide information on how to initiate an unsubsidized loan application.
DIRECT PLUS LOANS
The Direct Plus Loan program is intended for graduate and professional students, and the parents of dependent undergraduate students. A student must be enrolled at least half-time. You do not have to demonstrate financial need. Critically important here is that those qualifying cannot have an adverse credit history. The annual amount that a student can borrow is determined by the student’s cost of attendance minus any other financial aid they may have received. The annual interest rate is currently 7.9%. The Financial Aid Office at your college can provide information on how to apply for a Direct Plus Loan.
DIRECT CONSOLIDATION LOANS
The Direct Consolidation Loan Program is intended for students who want to combine multiple federal student loans into one loan. Note, parent Plus loans cannot be transferred to student and become the student’s responsibility. The interest rate is a fixed rate based on the weighted average of the interest rates being consolidated, rounded up to the nearest one-eighth of 1%. The interest rate cannot exceed 8.25%.
The Financial Aid Office at your college can provide detailed information on all the Federal Student Loan Programs, or you can get information on online at www.studentaid.ed.gov.