EDUCATIONAL LOANS
An education loan is a form of financial aid that must be repaid, with interest. Education loans come in three major categories: student loans (e.g., Stafford and Perkins loans), parent loans (e.g., PLUS loans) and private student loans (also called Alternative student loans). Few students can afford to pay for college without some form of education financing.
Many students rely on federal government loans to finance their educations. These loans have low interest rates and do not require credit checks or collateral. Student loans also provide a variety of deferment options and extended repayment terms. Student loans include the Federal Stafford and Federal Perkins Loans.
Stafford Loan (Guaranteed Student Loan) - The main federal loan for students is called the Stafford Loan and has two variations:
 | Federal Family Education Loan Program (FFELP) loans are provided by private lenders, such as banks, credit unions and savings & loan associations. |
| Federal Direct Student Loan Program (FDSLP) loans, administered by "Direct Lending Schools", are provided by the US government directly to students and their parents. |
All Stafford Loans are either subsidized (the government pays the interest while you're in school) or unsubsidized (you pay all the interest, although you can have the payments deferred until after graduation). To receive a subsidized Stafford Loan, you must be able to demonstrate financial need. With the unsubsidized Stafford loan, you can defer the payments until after graduation by capitalizing the interest. This adds the interest payments to the loan balance, increasing the size and cost of the loan. All students, regardless of need, are eligible for the unsubsidized Stafford Loan. Many students combine subsidized loans with unsubsidized loans to borrow the maximum amount permitted each year. Repayment begins six months after the student graduates or drops below half-time enrollment.
Perkins Loan - The Perkins Loan is awarded to undergraduate and graduate students with exceptional financial need. This is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government. The Perkins Loan is the best student loan available. It is a subsidized loan, with the interest being paid by the federal government during the in-school and 9-month grace periods. There are no origination or default fees, and the interest rate is 5%. There is a 10-year repayment period.
Plus Loan - Parents of dependent students can take out loans to supplement their children's aid packages. The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance. There is no cumulative limit. Like the Stafford Loan, PLUS loans are either FFELP (provided by private lenders, such as banks) or Direct (funds provided by the government). The interest is not subsidized while the student is in school, unlike the subsidized Stafford and Perkins loans. Repayment begins 60 days after the funds are fully disbursed, and the repayment term is up to 10 years. There is no grace period as there is with the Stafford Loan program.
PLUS loans are the financial responsibility of the parents, not the student. Eligibility for the PLUS loan depends on a modest credit check that determines whether the parent has an adverse credit history. If a student's parents are denied a PLUS loan, or the college financial aid administrator determines that the parents are likely to be denied a PLUS loan, the student becomes eligible for increased Stafford Loan limits. Only one parent needs to apply for and be denied a PLUS loan. However, if one parent is denied a PLUS loan and the other is approved for a PLUS loan, the student is not eligible for increased Stafford Loan limits.
Students and families are encouraged to pursue federal financial aid before considering private educational loans. Private education loans tend to cost more than the education loans offered by the federal government, but are less expensive than credit card debt. The federal education loans offer fixed interest rates that are lower than the variable rates offered by most private student loans. Federal education loans also offer better repayment and forgiveness options. Since federal education loans are less expensive than and offer better terms than private student loans, you should exhaust your eligibility for federal student loans before resorting to private student loans.
Private Educational Loans
Private Education Loans, also known as Alternative Education Loans, help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Eligibility for private student loans, like with a home or auto loan, often depends on your credit score or creditworthiness. Some families turn to private education loans when the federal loans don't provide enough money or when they need more flexible repayment options. For example, a parent might want to defer repayment until the student graduates, an option that is not available from the government parent loan program
Not all Private Educational Loans are the same. Terms and conditions applicable to these loans vary greatly depending on the lender. Students should check with several lenders and ask the following questions when shopping for an Alternative loan:
| How are the interest rates calculated? T-bill, Prime, Libor |
| How often and when are interest rates adjusted? |
| Are there fees associated with the loan? |
| If there are fees, are they added in the beginning or before repayment? |
| Can they defer payments while they are in school? |
| What are the enrollment requirements? At least half time? |
| Does the institution require a cosigner for an Alternative loan? |
| If they do require a cosigner is there a cosigner release? |
| How is eligibility determined? Credit Score, Creditworthiness? |
After answering these questions students need to determine what terms are most important to them. Answering these questions will help students compare different Alternation Loans and make an informed decision when choosing an Alternative Loan
Before you borrow, think about how you will afford to pay the money back. Remember that you must pay back the loan, even if you drop out of school or don’t find a job after you graduate.
