Types Of Student Loans And Funding Options For College A Guide For Students

Congratulations! You have graduated high school, obtained your GED or you’re a working adult who has decided to return to school to accept a degree. You have applied and been accepted to a college or university, and now you are faced with the daunting decision of how to pay for this higher education. Not to worry there are many options available to you, and a few of them are not based on your income or your credit score, which in this economy is wonderful news for those with less than perfect or no credit.

When it comes to your financial aide options, there are so many choices that it can be overwhelming to those that have never traveled the higher education financial aide road before. This guide will take you through the most popular choices, and along with giving you tips on how to apply, it will also give you both the pros and cons to each choice, and any costs that might occur for each loan (both private and federal), grant, scholarship, and even some alternate forms of financial aide. Your fist step should be to talk to a financial aide councilor at your college or university; they will be able to give you good options. Most colleges and universities have agreements with financial institutions, and that will be a spacious place to start your research.

As was stated earlier, there are many options when it comes to financial aide we will take this one step at a time.

Federal Loans

Federal loans are the easiest loans to get, because they are not based on your credit rep. That is not to say that they do not have restrictions. First let’s look at the different types of federal loans available to you whether you are unbiased out of high school, or a working adult going back to school. When it comes to your choice of federal student loans there are a few choices, but mainly it depends on your individual need to which loan you will get.

The most accepted, and by far the one most applied for are the Federal Stafford Loans. When it comes to these loans there are two kinds that students usually apply for and receive simultaneously. There are subsidized loans and unsubsidized loans, and the difference between the two is extremely important to know and understand. Subsidized loans are loans that the government pays the interest on while you are in school and during your grace period. Unsubsidized loans are the loans that the government does not pay for the interest. Knowing and conception the difference between the two can set aside you thousands of dollars when it comes to paying back these loans.

Both subsidized and unsubsidized loans are exactly the same after you understand the difference between what the government will and will not pay when it comes to the interest. As of the publication of this article the interest rate on both of these loans stands at a fixed 6.8%, and the payments are deferred for at least six months after the student either graduates from college or they fall below half-time enrollment.

These are the loans that most college, universities, vocational schools, and graduate schools recommend because of the large qualification potential. The only requirements for these particular loans are: you need to be a undergraduate or graduate student of a participating college, university, vocational school, or graduate/professional school; you also need to be a U.S. citizen or national, permanent resident, or eligible non-citizen; and you can not have defaulted on any educational loan or owe a refund on an educational grant. There are also some restrictions on criminal charges. The basic rule of thumb when it comes to the last requirement is that if you have any drug charges, especially felony charges, you need to check with your financial aide office before you apply.

These loans are based on financial need as positive by your educational institution, and generally the institution will have every student try for these loans as well as for the FAFSA grants. The last and most famous requirement for these particular loans is that you do have to fill out your federal FAFSA form, for federal grants. This should not discourage you because as you will learn later in this guide grants are literally “free money” that the federal government pays you to earn your degree.

There are a wide range of lending institutions that provide these loans and generally there are a select number that your educational institution has agreements with, the best advice is to use the lending institution that your school recommends, the processes is much simpler and faster, than if you try to expend a lender that does not have agreement with your school.

I personally have this type of loan, and it has been a god send for me and my educational needs. Another rule of thumb is to “max out” your loans, or apply for the maximum amount available to you. This might not seem like the smartest solution, but you will be thanking yourself once you do open attending your classes. And if you have any funds left over you have the choice of using the refund you will get to reimburse yourself for any expenses you have had to pay out of pocket, or you can send the excess back to your lender to reduce the amount of money you will owe when you start to pay back these loans.

The next option of federal loans is the PLUS loan which is geared towards parents of dependent undergraduate and graduate students. These loans are designed to pay the cost of tuition, books, and any other education related expenses. The plan this loan differs from the Stafford loans, is that first only parents or legal guardians of dependent students can apply for these loans. Unlike the Stafford loans the PLUS loan is based on the parents’ credit, and you are not required to apply for federal grants.

The credit check is a modest one, but it is looking for any adverse credit history of the parent or legal guardian, which means they are looking for any debt that is more than 90 days past due or they are looking for any Title IV debt within the past five years. Title IV debt includes: default determinations, bankruptcy discharges, foreclosures, tax liens, wage garnishments, write-offs, and debt do to grant overpayment. While in this economy of widespread foreclosures, it is still not a bad idea to at the very least research and look at these loans as a supplement to your financial aide arsenal.

This loan does have a slightly higher interest rate than the Stafford loans at 8.5% as of the publication of this guide. This interest accrues when it is dispersed to the educational institution, but there are ways that you can get an interest credit when you are paying back this loan. Many lenders offer a 0.25% interest credit when you agree to repay your loan using an automated debit from your checking account. If you want to lower your eventual monthly payment, then you might want to consider speaking to your lender about consolidating your PLUS loans at the last dispersment of every academic year. This has the potential to attach hundreds of dollars off your payments in the long run.

The fees that are attached to this loan are a 3% origination fee, and a 1% guarantee fee, but most lenders are waiving the guarantee fee at this time. Once your student graduates or falls below half-time enrollment, this loan cannot be transferred to the student. This loan is the sole responsibility of the parent to repay. This might be something to think about for parents, before they apply.

The last federal student loan is the Perkins Loan. This is again a low interest loan of 5%, as of the publication of this guide. This loan is based on financial need like the Stafford loans, but unlike the Stafford loans the school is the lender, not a bank. The federal government does fund the loan; however the education institution is also required to contribute a portion of the funds for this loan.

This loan is unique; because your school is your lender, and that is also who you repay once your grace period has expired. This also a no fee loan, meaning that other than late payment or partial payment fees, there are no other fees associated with this loan. The grace period on this loan is also a little bit longer than either your Stafford loans or PLUS loans. The grace period of a Perkins loan is approximately nine months after graduation or a student falls below half-time enrollment. This can make this loan a little easier to repay.

The funds that are associated with this loan mimic the Stafford loans in some ways. The normal undergraduate loan is $4000 per academic year with a cap of $20,000, and the normal graduate loan is $6000 per academic year with a cap of $40,000 including the amount that was issued during undergraduate study. When it comes to speaking of the repayment and loan amounts there is one other good thing about all of these loans.

There are tax incentives for certain higher education expenses including both federal and non-federal loans. This means that certain borrowers can deduct the interest for student loans with a maximum deduction of $2500.00.

All of these loans can be good options depending on you individual financial need. There is no “one size fits all” when it comes to higher education aide, so take the time to understand your beget financial situation before you dive into any loan. Once it is time to repay your loans there is an proper option that is highly recommended by any financial counselor that you might talk to, and that would be loan consolidation.

Federal Loan Consolidation is an option that is begin to students and parents (depending on which loans you have) that have federal student loans. You are eligible to take advantage of this program if you have outstanding loans, but are detached in the grace period or are in the repayment phase of your loans. You can still take advantage of this option if you are in default as long as you have made a satisfactory arrangement to repay your loans. This is totally at the discretion of the lender. In these economic times, lenders are more willing to grant consolidations even if you have fallen into default, as long as you execute a good faith effort to repay. This option can save sometimes hundreds of dollars on your monthly loan payments depending on how much money you owe.

The interest on these consolidation loans are a weighted average of the loans that are being consolidated. They will round up the percentage rate to the nearest 1/8%, but there is a cap at 8.25%. This may be an option really worth looking into especially if you have a large amount of money that needs to be repaid.

Private Student Loans

The popularity of private student loans has skyrocketed in the past few years; the growth has been even faster than the federal student loans. If this upward trend continues the private education loans will surpass the federal loans within the next ten years. The Private Student Loans are some what similar to the federal loans, and just like the federal loans the private sector also offers loan consolidation for their education loans.

That is where the similarities destroy. The private student loans are very different, and are harder to get than the federal student loans. The general rule is only mediate private education loans, if your federal loans and grants have been “maxed out” and found to be insufficient for education and other living and educational expenses. Make sure that you have first applied and received your FAFSA, and federal loans before you even inaugurate to research the private loans.

Federal loans are normally less expensive, not to mention much easier to get, and have much better repayment terms. The fees that are associated with private student loans can dramatically increase the cost of your loan. As a rule when looking for a private student loan, look at all of the costs associated with these loans such as, the interest rate, and the fees. Remember that loans with low interest rates and high fees will actually cost you more than loans with slightly higher interest rates and no fees.

Do your homework when comparing these loans. When it comes to comparing interest rates and fees are; for every three to four percent in fees add one percentage point in interest. This will help you compare apples to apples when looking at different types of loans. Do not try to compare loans with different repayment terms. This is critical because longer terms will have a lower APR (annual percentage rate), but the total amount of interest you will pay will be higher than a shorter payment term with a slightly higher APR. Remember that your APR is a rate that factors in the interest, fees, and other terms on top of the principle of your loan.

The best private student loans will have interest rates of LIBOR + 2% or PRIME – 0.5% with no fees. The LIBOR rate is the average interest paid on deposits of US dollars in the London market. LIBOR actually stands for London Interbank Offered Rate. The PRIME rate is the rate banks charge their most credit worthy customers. PRIME actually stands for Prime Lending Rate as published by the Wall Street Journal. If you are able to acquire this percentage rate then your private loans will cost about the same as the Federal PLUS loan.

The downside to this is that only approximately 20% of the population would be able to acquire the rates that would make private education loans will nicely compare to the rates that anyone can get with the federal loans especially the Stafford loans.

When looking for your private student loans you really want to apply for loans that are pegged to the LIBOR index over the loans that are pegged to the Prime Lending Rate, if all other factors in the loans are equal. This will build you some money in the long run. About half of the lenders available are pegged with the LIBOR index and about 2/5 are pegged with the PRIME. The reason that more lenders work under the LIBOR index is that this index reflects the cost of capital of the bank. Which is better than the reason some banks work under the PRIME index, the reason is that PRIME + 0% sounds better to the average consumer than LIBOR + 2.8% when it is actually exactly the same.

It is also not uncommon for lenders to advertise a lower rate for the in-school and grace period deferment with a higher rate that goes into effect when the repayment period starts. All of this information may seem like you need an MBA to compare loans and get the best rates, and in some cases that might be true, but here are some tips to comparing these private student loans for the rest of us.

Interest rates, fees, and loan limits all depend on the credit history of the borrower, and the credit history of the co-signer, which with these types of loans is almost a necessity. They also depend on the options you choose that go with of the loan such as, loan deferment, repayment schedule, and the total amount you are applying for. Most lenders also require school certification or approval and will have an annual cap on the amount you can apply for, which is the cost of the education minus any other financial encourage you might already be approved for. This is known as COA-Aid. The lender may also employ a cumulative cap on the total amount you can receive throughout your entire education.

Another thing that you need to understand is that lenders rarely insist you the complete details of each loan until after you have applied for it, this helps prevent comparisons based on the cost of the loan. FinAid.com states that “many lenders will only advertise the lowest interest rate they charge (for good credit borrowers). Borrowers with bad credit can expect interest rates that are as worthy as 6% higher, loan fees that are as much as 9% higher, and loan limits that are two thirds lower than the advertised figures”. This means that if you do not have perfect credit you will be allowed to borrow less money, but will destroy up paying much more when it comes time to repay your loans.

Private student loans can be a great option if your federal financial aid is not enough to cover your education costs, however they do have many fees and if you do not have perfect credit they can be extremely expensive. Below is a short list of only some of the lenders that offer loans and there terms. This information was taken directly from the FinAid website for the complete list visit http://www.finaid.org/loans/privatestudentloans.phtml.

Ø Academic Finance Corporation

v FOCUS Consumer Education Loan

§ 0.25% interest rate reduction for auto-debit

§ Limit: COA-Aid

§ Rates: Best credit glean has a rate of LIBOR + 2% and the worst credit score has a rate of LIBOR + 11%

§ Fees: 0% – 11%

§ Term of 20 years

Ø Access Group

v School Certified Private Student Loan (Graduate & Undergraduate)

§ 0.5% interest rate reduction for auto-debit and after the first 48 consecutive on-time payments.

§ Limit: COA-Aid, $250,000 (undergraduate plus graduate combined)

§ Rates: With a Creditworthy Cosigner: PRIME – 0.5% to PRIME + 6.9% and without a Creditworthy Cosigner: PRIME – 0.5% to PRIME + 7.9%

§ Fees: 0% to 9%

§ Term: 25 years

This is only an extremely short sample of the different loans that are available; please visit the website to get the entire list of all the private student loans available. When it comes to obtaining these loans you need to be extremely careful about which loan you do eventually apply for. Private Student loans can be extremely expensive if you are not careful and compare the rates of the different loans. Also be sure and know exactly how much you can afford to repay, you might not have an exact number you will be able to afford, but you will be able to invent an educated guess. It is also a good idea to check your credit with all three credit bureaus and also check your credit score before you try for any private student loan, because ultimately your credit will be the deciding factor when it comes to these loans. In this economy a great credit score is very hard to advance by, but it is also what you will need to convince the bank to give you this type of loan, with a really helpful interest rate.

Scholarships

There are literally thousands of scholarships available to students. Like grants scholarships are considered “free money” meaning this is money you will never have to repay. While scholarships are a form of “free money” they can be extremely difficult to obtain. They generally have extremely specific requirements; as well some have a very lengthy and intrusive application process.

Do not let this application process turn you off this beget of financial aid, because in the long run it has the potential to save you thousands of dollars over your entire academic career. There are scholarships for just about every academic and athletic achievement that a student could receive, but finding the right scholarship for your situation can be extremely difficult. The best way to research scholarships is to go to your financial or enrollment counselor at your college or university, you can also do some research on the internet, but the information is confusing and overwhelming at best.

When speaking to your consular be sure and ask if you qualify for any scholarships. They will not only be able to tell you if there are any scholarships available, he or she may be able to befriend you apply for and give you the deadlines that you will have to meet.

This is an noble plot to pay for your higher education, if you can obtain one or more scholarships. The process may be frustrating, but remember that it can assign you thousands of dollars in the long run, so this is defiantly an option that deserves your attention.

Grants

This is by far the easiest and best way to pay for college. Grants like scholarships are completely “free money” that the government or private institutions pay you to go to college. Also like scholarships grants can save you thousands of dollars over the course of your academic career.

Unlike scholarships, grants are very easy to qualify for; basically if you are breathing you qualify for at least one grant that is available. Finding and applying for grants are also extremely simple. Honestly applying for your grants should be the first thing you do after you have been current to college. To do this all you need to do is log on to the FAFSA website at: http://www.fafsa.ed.gov/. There are some firms that will help you apply for these grants, but this free website is so easy to navigate, honestly I would put your money. Your financial counselor at your college or university will also walk you through the process if you get stuck. There is no need to pay to have someone do this for you.

Enjoy it or not when you fill out your FAFSA application you are not just applying for one grant. This one application will cover all of the federal grants available, which makes the process even easier. Once you get your acceptance gaze, either by e-mail or letter, you will see how many grants you have qualified for.

As I said earlier there are many private institution grants available, but they very so widely from state to state, checking with your college or university is the best way to derive the information on these non-federal grants. As I said before the money is free so by all means apply for as many grants as you qualify for, because the more grants you get that means the less money you will have to borrow and pay back to a bank, which of course will achieve you thousands of dollars every year.

Alternative Funding Options

When people talk about alternative funding options they are generally talking about private student loans, which can cost you a lot of money that you may not need to spend. With scholarships and grants, and these alternative you may be able to attend your college or university for less money out of your pocket than you once thought.

Most colleges and universities have tuition payment plans, these are a good option because they have no interest attached to them, and typically the payments are divided over eight to twelve months. This options helps you limit the need to apply for student loans, by allowing families pay the cost connected to the cost of college from your unique income. There may be an enrollment fee attached to this option, and your school’s financial befriend office can give you more information about these plans.

There is also the option of Home Equity Lines of Credits (HELOC), this is a revolving line of credit that is backed by the portion of the home value that you own outright. The interest rates are generally variable, and payments will vary depending on the interest rate and amount owed. The upside to this type of loan is that the interest may be tax deductable, however you will need to check the IRS website for more information at: www.irs.gov. For this option you will need to contact your lending institution, and read all the fine print because certain fees may apply.

Another loan option would be a home equity loan, this is a one time lump sum based on the amount of equity a homeowner has in the property. This loan normally features a fixed rate, payment and terms, however certain fees may apply. You will need to contact your financial institution for more details on this loan. Like the home equity lines of credit check the IRS website for possible tax deduction on the interest.

Last but not least there is the G.I. Bill for military personnel only. This bill is for individuals that have served on active duty for at least ninety consecutive days after September 10, 2001. You may also qualify if you have been honorably discharged from active duty, released from active duty and placed on the retired list or temporarily disability retired list, transferred to Rapid Reserve or Fleet Marine Corps Reserve, or released for further service in a reserve component of the armed forces. If you have been honorably discharged from active duty for a service connected disability and you have served at least 30 consecutive days after September 10, 2001, you also qualify.

How much the G.I. Bill pays is based on the length of your active duty service, you will be entitled to a percentage of tuition and cost up to the most expensive public institutions or university’s in-state tuition. It will also pay a monthly housing allowance equal to the basic allowance for an E-5 with dependants, in the same zip code as your college or university. You will also receive a yearly reimbursement up to $1000 for books and school supplies, and if you are relocating from a highly rural area you will receive a one-time payment of $500.00.

Now if all of this sounds like a way to go there is even more. You will remain eligible for the G.I. Bill for 15 years after your period of 90 consecutive days of active duty or your 30 consecutive days of active duty if you were discharged because of a service-related disability. This is one more reason for you to join the military. You will need to contact the Department of Veteran’s Affairs or check out their website at: http://www.gibill.va.gov/.

While theses alternative financial options are available most of them are highly specific. You will need to research the options thoroughly, and contact the appropriate institutions to learn the specifics of these options.

While going to college is one of the most important things you can do after graduating high school or obtaining your GED, the choices of paying for this education are extensive and hopefully this guide has given you a few ideas, about the options that are out there for you. When applying for financial aid the process should not be overwhelming, or overly frustrating. While you should try some of the more difficult options make sure you understand all of the fees, and restrictions that come with each option. If you do not understand the terms and restrictions of the option you choose, be determined and ask a lot of questions. Doing this can and will effect you more money than you can imagine, just understanding the papers you sign will greatly reduce the risk of paying to much in the way of fees, interest, and other costs that pertain to getting your education. Again, congratulations on your new adventures.

References

1. Federal family education loan program (2008 September)

U.S. Department of Education. Retrieved from http://www.ed.gov/programs/ffel/index.html, on January 5, 2009.

2. Federal Stafford loans (2009)

Stafford Loan.com. Retrieved from http://www.staffordloan.com/, on January 5, 2009.

3. Private student loans (2009)

FinAid.com. Retrieved from http://www.finaid.org/loans/privatestudentloans.phtml, on January 6, 2009.

4. Funding options beyond federal student and parent loans (2009)

NHHEAF Network. Retrieved from http://www.nhheaf.org/index.asp? page=stu_fa_altfunding, on January 7, 2009.

5. GI bill website (2009 January

Department of Dilapidated Affairs. Retrieved from http://www.gbill.va.gov/, on January 8, 2009.

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