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Know Your Loans
by Roshan Tolani

 
These days, your education can determine the course of your career and financial future. Unfortunately, higher education is becoming increasingly out of reach because of the heavy financial costs that can be attached to it. For many people, a higher education is simply unattainable without outside aid. This is where student loans play a crucial role.

Student loans are money that incoming or matriculating students borrow to pay for educational and living expenses while in school that they will repay with interest upon graduation. Student loans can help students cover tuition and fees and other costs associated with obtaining an education such as study materials, room and board, and other expenses.

Before taking out any student loans, it is crucial that those interested in borrowing loans understand the types of loans they may be eligible for and the repayment terms and interest rates associated with those loans. Each person must then decide how much money he or she will need to borrow and which loan will best fit his or her circumstances. Here are some tips to help you make these determinations:

Types of student loans
There are two types of student loans: federal loans and private loans. Federal loans are backed by the government, while private loans are given through private institutions such as banks and colleges.

A. Federal Loans:
  1. Federal Direct Student Loan Program
  2. Federal Family Education Program
Federal Direct Student Loans are of following types:
  1. Federal Stafford Loan
  2. Perkins Loan
  3. Parents Loan for Undergraduate Students (PLUS)
  4. Graduate PLUS Loans
  5. Federal Consolidation Loans
There are two types of Federal Stafford Loans:
  1. Subsidized Loans
  2. Unsubsidized Loans
B. Private Loans are provided by:
  1. Bank loans
  2. Credit agency loans
  3. Financial institution loans
  4. College sponsored loans
Federal Loans Federal loans are guaranteed by the federal government. No collateral is required to obtain a federal loan. Some federal loans are need-based while others are not. Subsidized loans are based on need. The government pays the interest on subsidized loans until the student enters repayment. In the case of unsubsidized loans, the student has to pay all the interest although the interest rates are generally very competitive.

Federal loans are available for any student who:
  • has a high school diploma or GED or has passed a similar independent test approved by the U.S. Department of Education.
  • is a U.S. citizen or eligible non-citizen.
  • is enrolled with the Selective Service (for males aged 18 - 25).
  • is enrolled at least half-time as a regular student in an accredited institution.
Types of Federal student loans
Federal loans come in three basic forms: Federal Perkins loans, Federal Stafford loans and Federal Parent Loans for Students (PLUS). Your financial need and other criteria determine which of these loans you qualify for.

Federal student loans are popular as they generally have lower interest rates than most other available options and do not require a credit check. The amount you can borrow is determined by the cost of your educational program and by other factors instituted by the lender. These loans take into consideration the student's financial need and are regulated by the federal government. Borrowers can obtain these loans from a bank, a credit union, or directly from the government.

Stafford Loans
Federal Stafford loans are the most common loans awarded to students. Borrowers do not have to begin repayment on these loans until after graduation. These loans can be obtained to supplement scholarships, grants, or personal savings.

Stafford loans can be subsidized or unsubsidized. With subsidized loans, the government pays your interest for you while you are in school, during your grace period, or while your loans are in deferment. With unsubsidized loans, you will be charged interest while you are in school, but you do not have to begin actual payment on the loan until you finish your schooling. Stafford Loans are easy to get, but you are generally expected to repay them within ten years.

Subsidized Stafford Loan
You may qualify for a subsidized student loan if your income or your family's income does not exceed a certain level. This is a long-term loan with a low-interest rate. The government pays the interest on the loan while borrowers are in school or during their grace period or while the loans have been deferred. These loans are disbursed by participating banks and other financial institutions, but are guaranteed by the government. Repayment begins after a six-month grace period (after you graduate, leave school, or cease being enrolled as at least a half-time student).

Unsubsidized Stafford Loan
This is a non-need-based loan with a low-interest rate. This is the option for students who fail to qualify for any other financial aid. Interest on unsubsidized loans are the borrower's (and not the government's) responsibility to pay. You are charged interest from the time the money is disbursed until the loan is repaid in full. However, you may pay this interest while still in school. If not, interest will accumulate and will be added to the principal amount of your loan upon graduation. The remaining terms and conditions of subsidized and unsubsidized Stafford loans are same.

Federal Perkins Loans
Federal Perkins loans are awarded to students on the basis of financial need and usually carry very low interest rates. These loans are awarded and disbursed through the borrower's specific school or college. All Perkins loans are subsidized and have lower loan amounts. Perkins loans also have an interest rate which remains fixed for the entire life of the loan. Unlike Stafford loans' six-month grace period, Perkins loans have a nine-month grace period. They also have a maximum duration of 10 years. These loans are given very selectively after all other sources of financial aid have been exhausted.

Federal Plus Loans
Parents often contribute a sizeable amount toward funding a child's higher education. Recognizing this, there is a third type of loan that helps parents pay for their portion - the Federal Parent Loans for Students (PLUS). These loans are for those parents or guardians whose children are in college as full or half-time undergraduate students. Though these loans can be borrowed regardless of a family's income, lenders consider a parent's credit history and their child's cost of attendance. The maximum amount that your parents are eligible to borrow is equal to the cost of attendance minus any other aid you have received. PLUS loans enable parents to fund the complete cost of their child's education, including books, meals, and other expenses at a relatively low interest rate, which currently cannot exceed a limit of nine percent. Though the interest is low, repayment usually begins within 60-90 days after full disbursement of the loan. PLUS loans are guaranteed by the federal government, but are issued by participating financial lenders. PLUS loans also offer a number of repayment options, including plans for those with limited income and a deferred payment plan while the child is still in school. In sum, PLUS Loans have the following characteristics. They:
  • are not based on income or assets
  • require no collateral
  • accrue interest that may be tax-deductible
  • have a ten-year repayment duration
  • offer no prepayment penalty
  • offer loan amounts up to the total cost for the student education
Graduate PLUS Loans
These loans are for graduate or professional students. Generally, graduate students can get Graduate PLUS Loans amounting to the total cost of education, minus any other aid received. However, most graduate students still pursue lower-interest loans such as Subsidized or Unsubsidized Stafford Loans before seeking a Grad PLUS Loan. For Graduate PLUS Loans, it is the student, not the parent who is the borrower.

II. Non-government or Private Loans
Another option for those who fail to receive any federal loans, or who receive inadequate amounts of federal loans, is private loans. Private student loans provide an alternative to federal government-based loans. These loans are handled by private institutions such as banks, colleges and credit unions. These loans do not have any government guarantee and the rate of interest is set by the individual lenders. The lender determines the terms and conditions of the loan and whether a cosigner is required, especially in cases of a borrower having insufficient credit history. Each institution is different, so make sure you know all the terms and conditions before signing.

Student loans are a great way to fund your education, but they are also a serious obligation. Think and rethink about the amount you'll have to repay over the years before you take a loan. Assess all the options and explore them in depth before you settle on a loan.

Disclaimer: This article is only for informational purposes and should not be construed or relied upon as legal advice. We do not make any claims, promises, or guarantees about the accuracy, completeness, or adequacy of any of the information provided in this article.



 


Article Title : Know Your Loans
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Education is one of the most basic right of any human, but with the increase in prices and the costs involved in education this has made these rights turn into a privilege which very few can enjoy. Any normal person today in the whole of United States has to take an education loan at one point of time to pay for their education fees.

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