Student Loans: An Overview

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If you’ve read the news lately, you know money is tight. The economy’s not looking good, a lot of people have lost their savings and, not surprisingly, debt is rising. Further, banks are reluctant to loan out money. If you’re currently in school or looking to matriculate, you may be at a loss as to how to pay for your education.

But fear not: You still have many resources at your fingertips. Read on for details about everything from what kinds of loans are available to what you should do if you have existing payments.

If You Need a Loan

According to FinAid.org, a public service site, there are three main types of academic loans: federal student loans, parent loans and private student loans.

Federal student loans typically have low interest rates and don’t involve credit checks. There are two types of federal loans: Stafford and Perkins. Stafford Loans can be either subsidized, meaning the government pays the interest while the student is in school, or unsubsidized, meaning the student pays the interest, which may or may not be deferrable. Interest in 2008-09 is set at 6 percent, but it gets progressively lower through 2012. (For example, rates for 2009-2010 are set at 5.6 percent.)

According to FinAid.org, about two-thirds of subsidized Stafford Loans are given to students from families with household incomes of less than $50,000. You can read more about them here.

Perkins Loans are similar to Stafford Loans but are awarded to undergraduate and graduate students with “exceptional financial need,” according to FinAid.org. All Perkins Loans are subsidized with an interest rate of 5 percent.

Next, parents can request funds either from the federal government or via a private source such as a bank. These are officially known as Parent Loans for Undergraduate Students (PLUS). PLUS Loans from the government — referred to as Direct PLUS — offer an interest rate of 7.9 percent, while loans from private sources (FFEL PLUS) have a fixed rate of 8.5 percent. Interest is not subsidized, and PLUS loans carry an origination fee of 4 percent. Learn more about PLUS loans here.

The final option is for the student to take out a loan from a private lender. These are known as private education loans, or alternative education loans. Families typically turn to these loans when the federal variety do not provide enough funding. Private loans cost more, however. The interest rates and fees depend on the student’s credit score, and if your score is less than 650 — using the FICO (Fair Isaac Corp.) standard — you’re unlikely to be approved. However, you can boost your chances by including a co-signer, as this person’s credit score is factored into the decision, as well.

Finally, if you need funding, don’t forget to look at scholarships and federal grants. Scholarships typically are based on academic prowess, athletic achievement or financial need. Grants typically come from the government and can be based on a variety of factors, similar to scholarships. Relevant grants include the Federal Pell Grant, Federal Supplemental Educational Opportunity Grant (FSEOG), Academic Competitiveness Grant (ACG) and the National SMART Grant.

Private loan giant Sallie Mae includes more information about grants and scholarships, including how to apply, here on its Web site. And don’t hesitate to try, even if you think your chances are slim. Since scholarships and grants are basically free money — they don’t have to be repaid — it’s worth a shot.

If You Have an Existing Loan

If you’re struggling to repay an existing loan, the first step is to understand your options. There are different kinds of repayment plans, such as standard, graduated or income based. You also can look into loan consolidation to lump any and all existing payments together. Or you might want to prepay some of the loan to avoid extended interest. Study up on your rights and responsibilities as a borrower. You can check out this page on the Sallie Mae Web site to get started.

If you have additional questions, the Student Loan Borrower Assistance Project offers advice and gives step-by-step instructions on how to solve loan problems.

Now is the time to take a cold, hard look at your student loans. If you apply the same dedication and attention to detail to researching your funding as you do to your schoolwork, you can really maximize your savings.

–    Agatha Gilmore, agilmore@certmag.com

 

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