Loans

Student loans often are part of a financial aid package. They have lower interest rates than ordinary loans - you pay the lender less for borrowing the money - but paying back loans can still be a burden when you're starting out in the workforce. Here are some tips on loans:

• Borrow only what you absolutely need.
• Keep careful records.
• Stay enrolled until you get your degree! If you leave college, you will have to start paying back your loans but you won't qualify for the best-paying jobs.
• Know the charges (fees and interest rates) before you borrow. Ask for an estimate of what your total debt will be.
• Ask about terms for making payments, including grace periods (how long you'll have to pay before you'll be charged a late fee) and the conditions for taking a break from payments (such as a lengthy illness, unemployment, or other hardships).
• Remember, you can't take a federal loan for more than it costs to attend your college.

Kinds of student loans

The federal government sponsors most education loans. The main types are:

• Federal Perkins Loans (Up to $4000 for undergraduate students; up to $6000 for graduate students) – A loan is different from a grant in that it has to be repaid, in this case, by the student. It is a low interest loan for undergraduate and graduate students who show financial need, so it is a need-based program. Students are able to borrow up to $4,000 for each year of undergraduate study up to a total of $20,000, and $6,000 per year for graduate students up to $40,000. The Perkins Loan has a fixed interest rate of 5% and the interest is paid by the government while students are in school. Payments are usually typical to the other federal aid programs—once per semester. Perkins loans may be forgiven and can sometimes be cancelled for those who enter the profession of teaching. Cancellation occurs after five years of full-time (full-time equivalent) teaching. The specific qualifications for cancellation can be found at: www.studentaid.gov.
• FFEL and Direct Loan Programs - The Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program are the two largest federal loan programs in the country. Both programs are essentially the same; the only difference is that the FFEL is delivered to students through banks, credit unions, and other organizations that participate in the FFEL program. Direct Loans are delivered to students directly through the institution from the federal government. From the student’s point of view, this difference is largely invisible. Whether a student participates in a FFEL or Direct program depends on the school, which is free to make that choice. There are essentially three different types of loans that students can get through the FFEL and Direct Loan Programs. The first two come under a program called the Stafford Loan program. One loan is “subsidized,” meaning that the government pays a student’s interest rate during studies, while the other is “unsubsidized,” meaning that students are responsible for the compounding interest during studies. The third program is the PLUS program (Parent Loans for Undergraduate Students). They are only for parents and stepparents of dependent students.
• Stafford Subsidized and Unsubsidized Loans - The interest rates on Stafford loans first disbursed before July 1, 2006 are variable, meaning they may change from year to year and are adjusted on July 1 of each year. Interest rates are capped at 8.25 percent, but for 2006-2007 the rate will be 6.54 percent in-school, grace and deferment and 7.14 percent in repayment. The interest rate on Stafford loans first disbursed on or after July 1, 2006 is fixed, meaning it will not change. The fixed interest rate is 6.8 percent. The Stafford subsidized loan is awarded on the basis of financial need, and students do not pay interest during school. The Stafford unsubsidized loan is not a need-based program, thus it is open to anyone, not just those who can show financial need through the calculation of EFC. With unsubsidized loans, students are responsible for loan interest from the origination of the loan. That is, the interest will accrue during school, unless the student chooses to make interest payments during the in-school period. To put this in perspective, if a student received $10,000 in Stafford subsidized loans during school, he or she will begin paying off that $10,000 within six months of graduation, dropping below half-time, or leaving school. If a student received $10,000 in unsubsidized loans during school, he or she is responsible for not only paying that $10,000 amount, but also the interest that accrued during school. That could be $11,000 or more, depending on how much interest was able to accrue in the study period. The student may choose to pay on the interest while during the in-school period. To be eligible for a Stafford loan, students must be enrolled in an eligible program for at least half time. Students must file a FAFSA in order to receive a Stafford Loan. If the student receives a loan, they will have to sign a promissory note that says they agree to repay the loan. New loan borrowers must complete an entrance interview either online or in person with a financial aid officer from the school they enroll. The school financial aid officer will give the student further information on the promissory note and the agreement to repay the loan.

Borrowing Limits. The amounts you can borrow depend on a number of factors, including grade level, dependency, and whether students are undergraduate or graduate students. The table below illustrates the limits based on these factors. Because of the Higher Education Reconciliation Act of 2005 (HERA), loan limits will change as of July 1, 2007. Please note, aggregate loan limits or the maximum total debt has not changed.

Learn more about student loans.

Applying for a student loan

You can find out everything you'll need to know about applying for a student loan from the college you plan to attend. Ask at the financial aid office. The first step is to complete a master promissory note - a legal agreement you sign with a lender. You can borrow more later on during college by adding amounts to the note.

The money will be sent directly to your college in installments. The college will use it to pay some of your costs (such as tuition, fees, and room/board if you are living in student housing). Leftover loan money will be passed on to you by the college to pay your added expenses such as books and supplies.