Maybe you’re about to graduate from high school, you’re already in college or you’re the parents of an about-to-be college student. Whichever of these categories you might fall into, you’re undoubtedly facing the big question of how you’re going to pay for that higher education. If you’re like most of us, you’ll need some type of loan to finance it. But the whole issue of student loans can be very confusing. There are some things that you need to understand and here to help you are the basics or ABCs of student loans.
Direct and FFEL loans
These are loans made under the Federal Family Education Loan program (FFEL Program) and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both of these programs have about the same conditions and terms. You may receive Direct Loans, FFEL Loans or both – depending on the school that you are attending and the program in which it participates.
The William D. Ford Federal Direct Loan Program – these are loans provided by the US Department of Education (DOE). Their purpose is to enable students to pay for their education after high school. If you were eligible for one of these loans you would borrow directly from the US Department of Education. Direct Loans include the following kinds of loans: Direct Unsubsidized Loans, Direct PLUS Loans, Direct Subsidized Loans, and Direct Consolidation Loans.
Federal Family Education Loan (FFEL) Program – these are loans that come from private lenders but are guaranteed by the federal government. This includes the following kinds of loans: Federal Plus Loans, Subsidized Stafford Loans, Unsubsidized Stafford Loans and Federal Consolidation Loans. If you get one of these loans, you’ll pay it back to the secondary market, the actual lender, guaranty agency or the US Department Of Education. In the event your loan is sold to the US Department of Education, you will repay it to he DOE.
To be eligible for a federal loan you must complete the FAFSA (Free Application for Federal Student Aid) and must meet academic progress as determined by your Financial Aid Office and have a cumulative GPA of at least 2.0. You must be enrolled in school at least halftime, which is defined as six semester hours in a term and must be either a citizen or eligible non-citizen. You must also not be in default on any federal loan or owe a refund back to a Federal program. Finally, you must not have already exceeded your combined loan limits.
What are the limits on federal loans?
Here are the Federal Loan Maximums for loans first disbursed on or after July 1, 2008
|Classification||Dependent Undergraduate||Independent Undergraduate|
|Freshman (0 to 30 credit hours)||$5,500 – No more than $3,500 of this amount may be subsidized||$9,500 – No more than $3,500 of this amount may be subsidized|
|Sophomore (31 to 72 credit hours)||$6,500 – No more than $4,500 of this amount may be subsidized||$10,500 – No more than $4,500 of this amount may be subsidized|
NOTE: The amounts shown in the chart above are the maximum amounts that you may borrow as a full-time student (12 hours per semester) for the academic year. All annual loan limits are subject to proration and cannot exceed the Cost of Attendance
A definition of terms
There are several terms associated with student loans and it is important you understand their meanings. Here’s a list of those terms.
This is the amount of your loan plus any capitalized interest. When you repay your loan, your principle is generally referred to as your outstanding (unpaid) principal balance.
This is a portion of your student loan that your school pays out by either applying the money to your school account or by paying you directly. Generally speaking, students get their federal student loans in several disbursements.
Interest is what it costs you to borrow the money. It’s calculated as a percentage of your outstanding principal balance.
This is paying back the money you borrowed by making scheduled payments to the loan servicer.
Your Repayment Period is the maximum amount of time you can take to repay your student loan. Your Repayment Period can range anywhere from 10 years to 30 years, depending on your loan amount, repayment plan and loan type.
• You are expected make payments on a monthly basis
• Your minimum monthly payment must be at least $50 unless your lender agrees otherwise.
• The maximum time you will have for repayment is generally 10 years
• Your minimum annual payment won’t be less than the amount of interest due and payable.
• You can repay your loan at any time with no penalty. This will reduce the total amount of interest you will be required to pay on your loan. Your lender will offer you the opportunity to choose from among these options: A standard, a graduated, an income-sensitive, or extended repayment schedule.
This is a fee that’s charged for every federal student loan you get and will be a percentage of the total amount you are borrowing (gross amount). This is deducted equally from each disbursement you receive. It reduces the actual loan amount you receive (net amount). However, you must pay back the gross amount. Your loan fee amount will be in the disclosure statement you receive after the first disbursement of your federal student loan.
This is interest that you have not paid and that has been added to your outstanding principal balance. And you pay interest on the increased outstanding principal balance. In other words this means you’re paying interest on interest as well as your principle balance. Under most repayment plans this will increase your monthly payments and the total amount you will be required to pay over the life of your loan.
Your loan holder is the financial entity that has or holds your loan promissory note and has the right to collect from you. In the case of Direct Loans, your loan holder will be the US Department of Education. In some cases a reference to your loan servicer might mean the federal loan servicer, your loan servicer or your loan holder.
Loan Servicer/Federal Loan Servicer
This is the financial entity that collects payments from you on your loan, responds to any questions you might have and performs other administrative tasks that are associated with maintaining a loan on your behalf. A federal loan servicer is a loan servicer for the US Department of Education.
Subsidized loans vs. Unsubsidized loans
If you were to choose an Unsubsidized Loan, you would not be required to prove financial need. The US Department of Education does not pay interest on these loans and you will be paid by your school through at least two installments per semester. The school will use this equation in order to determine the amount of your unsubsidized loan.
Cost of attendance minus Federal Pill Grant (if you’re eligible), minus subsidized Stafford/Direct Loan amount (if eligible), minus any other financial aid you are receiving.
In comparison a Subsidized Stafford/Direct Stafford Loan is for students who have proved a financial need through their FAFSA. With one of these loans you would be paid through your school in at least two installments per semester. Plus, the US Department of education will pay the interest on your loan so long as you are a half-time student, for a grace period of six months after you leave school and during a period of deferment, which an approved postponement of your payments.