Student Loans – Which One Is For You?
Students and families are often confused with the variety of options available when it comes to financing a college education. There are a myriad of options, from college scholarships and grants to federal and private student loans.
As part of the Higher Education Act of 1965, President Lyndon Johnson created this law which was intended “to strengthen the education resources of our college and universities and to provide financial assistance for students in postsecondary and higher education.” This increased all sources of federal funding provided to universities and added in grants and other forms of financial aid.
The Federal Stafford Loan is available to both undergraduate and graduate students enrolled at least half-time at a college or university accepting federal aid. This is a need-based program in which undergraduates may borrow up to $5,500 per year in subsidized funds based on academic level and graduate level students may borrow up to $18,500 per year (up to $8,500 in subsidized funds and the remainder in unsubsidized funds). The funds are sent directly to the school and are applied to the student’s account. To ease the financial burden, payments are not required until six months after the student graduates. When looking to apply for a Stafford Loan, students should see what types of borrower benefits each lender is offering. As these student loans are all fixed at the same interest rate set by the U.S. Government, lenders are offering incentives to borrow by way of discounts, such as waived fees, rate reductions for early payment and cash back.
While a Federal Stafford Loan is certainly a necessary start, it doesn’t always cover the entire cost of education. A Parent PLUS Loan is a common way that parents contribute to their child’s education. This credit-based loan allows parents to borrow the total cost of undergraduate education including tuition, room and board, supplies, college fees and more, minus any other aid received. Once the loan has been put into the student’s account at the school, repayment begins shortly thereafter, at which time the student loan consolidation process can be performed. At a fixed interest rate, the Parent PLUS Loan is an easy and cost effective solution to help bridge the gap between Stafford Loan funding and the cost of education.
For many years, graduate students were only given Stafford Loans as a federal loan option for funding their often costly education. The difference was made up through home equity, savings, salaries and private loans. However, the Graduate PLUS Loan is a new product that became available to graduate students in 2006. Graduate students with good credit can apply on their own signature for a loan up to the cost of education, minus any other aid received. The Graduate PLUS Loan can be applied to tuition, room and board, education supplies, lab and travel expenses. The interest rate is fixed and payments are not required while enrolled in school. Upon graduation, borrower benefits kick in to help students save money during repayment. Or a student may save even more by consolidating this loan using the federal loan consolidation program. The Graduate PLUS Loan truly provides graduate students with a great option to making their graduate education dreams a reality.
The Perkins Loan is another federal loan available to both undergraduate and graduate students offered on the basis of financial need, other aid received and availability of funds at each school. The federal government lends schools funds for distribution to its neediest students. The school, therefore, is the lender, and undergraduates may be awarded up to $4,000/year and graduates may be awarded up to $6,000/year. These loans need to be repaid directly to the school and have a fixed 5% interest rate since the program was started. Students can take advantage of a nine-month grace period and a ten-year repayment term. However, if consolidated with any existing federal student loan, including Stafford or Graduate PLUS Loans, this can extend the repayment term. Consolidation has been mentioned a few times and it’s really in the best interest of students to take advantage of this upon graduation. Each federal loan, on its own, has a 10 year repayment term, regardless of total loan debt. Consolidation fixed the interest rate and extends the repayment term, allowing more time to repay an often hefty federal loan debt.
Named for Senator Claiborne Pell, the Pell Grant was established to provide funds that don’t need to be repaid directly to the neediest students. This is because it is a grant and not a federal student loan. However, like the Stafford and Perkins Loan, eligibility is based on need, as determined by the cost of attendance and expected family contribution. Since 2003, the maximum Pell Grant award has been $4,050 per academic year. However, due to the rising cost of education, many question why the Pell Grant award has not also increased. The Pell Grant covers, on average, one-third of the yearly cost of education at a public four-year institution. However, twenty years ago, it covered close to 60%. On February 15, 2007, in an attempt to slowly combat this issue, President Bush signed legislation into law that would increase the Pell Grant to $4,310 for the 2007-08 academic year. The following year, the grant will increase to $4,600 and up to $5,400 by the year 2012. These advances are certainly helping students and families fund the cost of education, especially as tuition costs continue to rise
Private student loans have gained popularity over recent years as federal funding hasn’t quite met the entire cost of education. There are many other costs associated with education, besides just tuition. Commuting students need to cover transportation costs somehow. City campuses don’t always guarantee housing, which forces students to find an off-campus apartment, often with high rent costs. There are costly textbooks to purchase, lab supplies and flights home that aren’t always covered by traditional financial aid. Private loans originate to students by a bank or other financial institution, unlike federal loans. Private student loans also offer similar benefits to students as a federal loan, such as deferred payment until graduation, different loan repayment terms, and borrower benefits. The interest rates on private loans vary from company to company and are, usually, on a basis of credit. Co-signers are a great way for a student who may have limited or no credit at all to get this loan. Because of the varying private loans available, most parents and families “shop around” until they find their ideal solution.
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