The cost of college continues to skyrocket. Once you’ve decided to attend college, the next step is to figure out how to pay for it. While there are several sources of financial aid, including scholarships and grants that do not need to be paid back, one of the most popular and available options to finance a college education is a student loan.
The largest provider of student loans is the U.S. Government. When you obtain a federal student loan, you will deal with a single entity, the loan servicer, which could be a private company. Nevertheless, the lender is still the U.S. Government.
With the passage of the Student Aid and Fiscal Responsibility Act of 2010, all federal loans are now offered through the U.S. Department of Education and not through private institutions. Four major kinds of student loans are now being offered as part of the Federal Direct Loan Program:
- Stafford Loan
Subsidized - This is a low interest loan for which the government pays interest while you are in school, during grace periods and during periods of deferment. To qualify, you must demonstrate financial need.
Unsubsidized - This is a low interest loan for which you pay all the interest, even during the grace period and periods of deferment but you can defer these costs while in school. There is no financial need requirement.
- PLUS Loan
This is a low interest loan available to parents of undergraduate and graduate students and to graduate students. Interest is charged during all periods and loans require a credit check.
- Direct Consolidation Loan
All eligible federal loans can be consolidated into one loan after the borrower leaves school. Loans made to parents and those made directly to students cannot be consolidated.
Other Student Loans
- Perkins Loan
This low interest loan is available to students who demonstrate financial need. The federal government provides funds to individual colleges, which in turn act as the lender to the students.
- Private or Alternative Loans
Private loans are offered by private lenders such as banks and other financial institutions and eligibility often depends on your credit score. Private loans are generally more expensive than loans offered by the federal government and may have fewer repayment options.
- Minnesota State Loan
The Minnesota Student Educational Loan Fund (SELF) program is a long-term, low interest educational loan available from the Minnesota Office of Higher Education (OHE). The program is distinctive to Minnesota and OHE is the only lender in the program.
Before You Apply
Before you apply for a loan, you need to know how much your total costs will be (tuition, room and board, etc.). Get as much information as you can to aid in your planning. You can get information from your school’s website, the financial aid office or the admissions office. Information may also be available on the Internet, from your high school counselor or OHE.
Once you determine how much your costs will be, figure out what financial resources you have available. These may include scholarships, prepaid college savings plans, grants, personal savings and money from grants. Information on scholarships and grants can also be obtained from the Internet, your school’s financial aid office or the admissions office and OHE. In addition, there may be local community organizations offering scholarships.
Applying for a Loan
The first step in applying for a federal Stafford loan is filling out the Free Application For Federal Student Aid (FAFSA). The FAFSA is used by most two- and four-year colleges and universities and career schools to award federal student aid. It is also used to determine eligibility for federal work study programs and grants, as well as by many state agencies.
You may complete the FAFSA online or download a PDF version at www.fafsa.gov. Paper copies of the FAFSA can be obtained by calling the Federal Student Aid Information Center at 800-433-3243 or from your school’s financial aid office. Parents applying for a PLUS loan need to fill out a separate application which is available from your school’s financial aid office.
Receiving a Loan
After your school has completed its evaluation of the FAFSA, the financial aid office will put together a financial aid package and send you an award letter. The package may include work study, grants, scholarships and loans. Carefully review the award letter to determine what type of loan you are getting. Make sure you understand the terms and conditions of the loan such as the interest rate and repayment amounts.
You don’t have to accept the full amount of the financial aid award. In fact, you should try to borrow the lowest amount that will cover your costs and still allow you to be able to repay the loan. The final step is to sign a promissory note, after which you are legally obligated to repay the loan.
Repaying a Loan
When you signed the legally binding promissory note, you agreed to repay the loan according to its terms. You are responsible to repay the loan even if you quit school, if you can’t find a job or are dissatisfied with the education you received. Repayment should be tackled immediately after graduation or within the six month grace period, as applicable to your situation.
Some people find it difficult to keep up with the payments. If you find yourself falling behind, contact your loan servicer immediately because missed payments could send your loan into default. There are several options that may be available to you:
- Changing Your Repayment Plan
You may be able to extend the payments or make graduated payments. Extending your payments will result in lower monthly payments but you may pay more because of the longer repayment period. Graduated repayment plans start out low and increase every two years. This option may be helpful if you expect your income to increase.
- Income Based Repayment Plan
Income Based Repayment (IBR) is a new payment option for federal student loans. It helps borrowers keep their loan payments affordable with payment caps based on income and family size. For most eligible borrowers, IBR loan payments will be less than 10% of their income and sometimes smaller. IBR will also forgive the remaining debt after 25 years of qualifying payments. IBR is available to federal student loan borrowers and covers most types of federal loans made to students, but not those made to parents. To determine whether you are eligible for IBR you may go to www.IBRinfo.org.
- Consolidating A Loan
If you have multiple loans, you may consider a consolidation loan where the interest is the weighted average of all the loans being consolidated. While the payments may not be less, getting all of your loans into one payment can make it easier to keep track of your payments and where you are in the payment cycle.
- Ask For A Deferment Or Forbearance
If you are having trouble paying a student loan, work with your loan servicer or lender before you default. Two other options include deferment and forbearance. Deferment is a legal right you have to postpone payment if you meet the criteria for deferment. Examples might include going back to school, or the birth of a child. Forbearance is when you ask the lender for a temporary break in payments, or a reduction in payments. The lender may grant your request for a forbearance, but the lender is not obligated to do so. Either of these options may buy you a little time to get back on your feet financially. However, you still owe the money you borrowed, and when the deferment or forbearance ends, you will.
Cancelling a Loan
Under certain specific circumstances, you may be able to have all or part of your loan cancelled. Contact your loan servicer to determine your eligibility. Examples include:
- Total and Permanent Disability
Your loan may be cancelled for total and permanent disability if you are unable to work and the condition has lasted or is expected to last for a continuous period of six months.
- Loan Forgiveness for Teachers
If you are a teacher and also a new borrower and have been teaching full-time for five years in a low-income elementary or secondary school or educational service agency, you may be able to have as much as $17,500 of your subsidized or unsubsidized loan cancelled.
- Public Service Loan Forgiveness
Public Service Loan Service Forgiveness is a new program for federal student loan borrowers who work in certain kinds of jobs. It will forgive remaining debt after 10 years of eligible employment and qualifying loan payments. The program is available to people who work in a wide range of public service jobs, including jobs in government and nonprofit 501(c) organizations. Eligible jobs include employment by federal, state, local or tribal government, nonprofit tax exempt organizations, full-time service in AmeriCorps or Peace Corp positions. Other loan forgiveness options may be considered on a case by case basis. Only direct loans or other loans consolidated into a direct loan are eligible for this program.
Students loans are generally not dischargeable in bankruptcy.
What if You Default?
If you default on your loan, the lender may take action to recover the money. The lender may garnish your wages, seize your tax refunds, and deny future requests for federal student aid. In addition, a default will generally be reported to credit bureaus, and remain on your credit report for seven years. This will hurt your chances to obtain other credit.
If you have defaulted on your student loan, consider a couple of options. First, you may try to rehabilitate your loan. If you successfully rehabilitate your loan, the default notation will be removed from your credit report. To rehabilitate a Direct Loan, you must make 12 consecutive monthly payments. To rehabilitate a Federal Family Education Loan (FFEL), you must make 12 payments.
Second, you may consider consolidating a defaulted loan. Consolidation helps you combine one or more loans into a new loan. To do this, you must make a “satisfactory repayment agreement,” usually consisting of three consecutive monthly payments, with the prior lender.
For help and more information, contact these agencies:
United States Department of Education
Federal Student Aid Information Center
P.O. Box 84
Washington, DC 20044
Federal Student Aid Information Center
P.O. Box 84
Washington, DC 20044
Minnesota Office of Higher Education
1450 Energy Park Drive, Suite 350
Saint Paul, MN 55108-5227
Cosigning a Loan
Banks require another person to cosign a loan because they do not have confidence that the individual borrower can repay it. There are, however, significant legal implications for a cosigner.
Scholarship and Financial Aid Scams
As college costs continue to rise, students increasingly find themselves searching for scholarships and financial aid. Through high pressure sales seminars and other methods, some unscrupulous companies purport to guarantee or promise scholarships, grants, and other financial aid for a fee, but deliver little or none of the promised assistance.
Student Loan Assistance Scams
Student loan assistance scams try to hide the fact that they charge thousands of dollars for something borrowers can do for free, often claiming to have “inside information” or special relationships with the U.S. Department of Education to dupe borrowers into paying.