Learning the “Lingo” & the Limits
It is that time of year when seniors and their parents find themselves pouring over colleges’ financial aid awards, often with many gasps of disbelief at the numbers staring back at them. Like it or not, borrowing at some level – by students, parents and sometimes both – has become a necessary part of the college funding equation for the majority of families at some point in the college-going process. (This reality gives us ample opportunity to be mindful of the fact that college is an investment!) Furthermore, the Deficit Reduction Act of 2005 signed into law by President Bush in February is bringing some significant changes to the major loan programs most often used by families having to borrow during the college years. As such, we thought we’d summarize some of the key points of the three most common loan programs typically packaged in financial aid awards so you better understand the “lingo” that may be appearing in your financial aid packages and some of the new developments that will affect them.
It is worth noting that we focus on the federal loan programs here but some colleges will package other loans in their awards beyond those described below. Colleges have all kinds of names for these other alternative loans, so be sure you ask the college about the lender, fees, interest rates, etc. of the loan(s) mentioned. Further, even if such a loan is not mentioned in a financial aid award, families can often access additional loan dollars in the private loan market to help meet the expenses that must be paid by the family. Keep in mind that you can and should shop around for the best deal by evaluating loan fees, interest rates, customer service options and the like available from various lenders. The ultimate goal is to minimize the amount you have to borrow and part of minimizing the debt burden is minimizing interest and fees - so be sure to fully evaluate all the options.
Stafford Student Loans
- Federal student loans that can either be provided by a private lender such as a bank under the FFELP Program (Federal Family Education Loan Program) or directly by the college with federal funds through the Direct Loan Program
- Subsidized for students with financial need under the federal formula that is not met by grants, scholarships or other financial aid (government pays interest while student is in school) - requires completion of the Free Application for Federal Student Aid (FAFSA)
- Unsubsidized Stafford loans are available to students regardless of financial need (student is responsible for interest while in school and can pay the interest or let it compound) - requires completion of the FAFSA
- Students have 6 months after graduating, leaving school or dropping below half-time status before beginning repayment (grace period)
- Beginning July 1, 2006, all Stafford loans issued after this date will carry a fixed interest rate of 6.8% - this is a change from a variable interest rate adjusted annually based on the 91-day Treasury bill + a factor and capped at 8.25%
- Current loan limits for dependent undergraduate students: $2,625 (first year); $3,500 (second year); $5,500 (third and fourth years); the limits for the first two years of study are slated to increase July 1, 2007 when the maximum amounts will be $3,500 (first year) and $4,500 (second year)
- Independent undergraduates and/or dependent students whose parents cannot secure a parent PLUS loan (see below) may borrow additional amounts under the Stafford program
- Changes to the origination and guarantee fees associated with Stafford loans also will be phased in over the next four years as a result of the Deficit Reduction Act of 2005 - changes vary depending on the Stafford program (FFELP or Direct) and the lender so be sure to investigate these fees
Perkins Loans
- Campus-based federal student loan (college acts as the lender for the federal funds it has available for this program)
- Awarded to students with significant financial need that is not met by grants, scholarships or other financial aid - requires completion of the Free Application for Federal Student Aid (FAFSA)
- Perkins loans are subsidized by the federal government (government pays interest while student is in school)
- Students have 9 months after graduating, leaving school or dropping below half-time status before beginning repayment (grace period)
- Interest rate locked at 5%
- Current loan limits for undergraduate students: $4,000 per year; maximum amount for undergraduate students (total) = $20,000; the actual amount awarded under this program is determined by the college based on available funds, number of eligible students, students’ level of financial need, etc.
PLUS Loans (Parent Loan for Undergraduate Students)
- Federal parent loans available to parents who are credit-worthy that can either be provided by a private lender such as a bank under the FFELP Program (Federal Family Education Loan Program) or directly by the college with federal funds through the Direct Loan Program
- Annual borrowing limit = student's cost of attendance minus any other financial aid received; student must be a dependent undergraduate student enrolled at least half time
- Repayment begins 60 days after disbursement of funds
- Beginning July 1, 2006, all PLUS loans disbursed after this date will carry a fixed interest rate of 8.5% - this is a change from a variable interest rate adjusted annually based on the 52 week Treasury bill + a factor and capped at 9.00%
A couple of other things to keep in mind:
1) These new loan rates apply to new loans issued after July 1, 2006. Loans issued before that date will continue to have a variable interest rate adjusted annually.
2) Consider consolidating your loans before July 1 when new consolidation rules take affect. Be sure you understand all of the implications of your loan consolidation before you sign on the dotted line.
3) If you still have questions, get the help you need. For more information on these federal loan programs, call the U.S. Department of Education at 1-800-433-3243, the college you/your student plan(s) to attend or visit: http://studentaid.ed.gov/students/publications/student_guide/2006-2007/index.html
