Loans for College
Understanding the Different Types of Loans Understanding the Different Types of Loans
Two Major Types of Loans
• Nonfederal Loans (Private,other sources) federal Loans (Private,other sources)
– Not based on need – Not government guaranteed – Terms controlled by lender – Interest rates may vary and fluctuate – Most must start repayment immediately
• Federal Education Loans (Federal Government)
Starts with the completion of a FAFSA form Perkins loans – need based Stafford loans – two types, one based on need and one not two types, one based on need and one not PLUS loans – for parents, not need based for parents, not need based Fixed interest rates and sometimes interest and repayment deferred Some subsidized (government pays interest while student in school) Some subsidized (government pays interest while student in school)
Federal Loans
• Federal loans are one of the Title IV programs
Title IV refers to a section of the federal Higher Education Act of 1965, as amended, which authorizes the vast majority of federal student financial assistance programs.
• Federal loans are “guaranteed”
Federal loans are loans that are guaranteed by the federal government. This means that if the student (or other borrower) defaults on the loan (fails to pay it back), the government will reimburse the lender.
• Federal loans are a good deal
They generally have lower interest rates and better terms that other loans.
• Some loans are subsidized
Means that the government pays the interest while the student is in school.
• There are 3 types of federal loans There are 3 types of federal loans
Perkins Loans
• Awarded based on high need level • Currently fixed 5% interest • Repaid starting 9 months after student leaves school or reduces enrollment to less than half time • Limited to $4000 per year and $20,000 total cap • Controlled by financial aid office at the college • Formerly referred to as National Direct Student Formerly referred to as National Direct Student Loans (NDSL) • No loan fee
Stafford Loans
• Two types of Stafford Loans:
– Subsidized
• Based on need • No interest until 6 months after student leaves school
– Unsubsidized
• Not based on need • Any student eligible if FAFSA completed • Can defer payment of interest Can defer payment of interest
PLUS Loans
PLUS stands for Parent Loan for Undergraduate Students
– Loans are for parents (and graduate students) – Not based on need – income is not a factor income is not a factor – Approved based on credit rating – Fixed interest rate up to 8.5% as of 7/1/07 – Loans may extend up to ten years – No maximum loan amount but schools can use discretion – Loan fees up to 4%, subtracted from the loan amount – A special form is used to apply (see A special form is used to apply (see www.studentaid.ed.gov) – Must be US citizen (or qualified non Must be US citizen (or qualified noncitizen) – Loan must be for educational purposes Loan must be for educational purposes
Applying for a Federal Loan
• The first step is the FAFSA or Free Application for Student Aid • The FAFSA must be refiled annually filed annually • You can file on line http://www.fafsa.ed.gov http://www.fafsa.ed.gov
• State and school deadlines for the FAFSA vary, but file as early as possible – around January 1 of the year(s) the student will around January 1 of the year(s) the student will attend • You will need Social Security #, Drivers License #, current tax return information, bank and investment statements. (ideally, have your taxes already completed)
• You can sign electronically if you have a PIN Visit www.pin.ed.gov to obtain a PIN (one time only) to obtain a PIN (one time only)
Promissory Notes
• Loans generally require the signing of a promissory note (PN) prior to disbursement of the funds. • A PN is a contract between you and the lender • When you sign a PN, you are agreeing to the terms and conditions it contains: rates, terms, fees, penalties etc. • Some federal loans use a Master Promissory Note (MPN) which you may be able to sign once for all your loan activity over a 10 year period. It can be completed on line. • Always keep a copy of your PN or MPN Always keep a copy of your PN or MPN
NonFederal Loans Federal Loans
• • • • • • • • • Not guaranteed by the government Come from other sources Also called “private” or “alternative” loans Not based on need Usually less favorable terms Payback & interest generally starts immediately Interest rates generally higher and can fluctuate Lender controls all terms, rates, fees etc. Students may be able to use a cosigner Students may be able to use a cosigner
Finding Private Lenders
Banks or credit unions You college might offer loans themselves Lenders recommended by college aid office State resources – search for your state’s Higher search for your state’s Higher Education Commission and look for aid • Sallie Mae offers private education loans • Parents could consider a home equity loan • Shop around for the best rates, fees and terms! Shop around for the best rates, fees and terms! • • • •
What is a Cosigner?
What is a cosigner?
A cosigner is another person who takes responsibility for the repayment of the loan. They guarantee the debt if the primary borrower fails to pay. As such, this is a large responsibility.
Why use a cosigner?
Many private loans are based on credit history. If you have none, or a history that isn’t favorable, a cosigner can make the loan possible and/or even help you get a better deal. (rates, loan possible and/or even help you get a better deal. (rates, fees, terms)
Final Summary of Loan Advice
• File a FAFSA – it can’t hurt and doesn’t obligate you it can’t hurt and doesn’t obligate you to accept any aid whatsoever. • If you are offered a federal loan, strongly consider taking it. They are almost always more attractive. • If you need other nonfederal loan(s), shop carefully federal loan(s), shop carefully and compare rates, fees, and terms before committing. • Before accepting any loan, be sure you understand the terms and obligations thoroughly. Ask questions. the terms and obligations thoroughly. Ask questions.