Student Loans

Student Loans:  Types, Descriptions and Application Process

When applying for any types of financial aid through the state and federal governments it is first necessary to fill out the free application for student aid or FAFSA.  The official website for the FAFSA is www.fafsa.ed.gov.  Any other websites that offer this specialized form are sites that are run by private companies and may charge a fee.  The official education website for the FAFSA is free, hence the name: free application for student aid.

The FAFSA application will ask questions to determine the students’ financial contribution and eligibility based on the student’s status as independent or dependent minor.  The next questions will consider work and other income, school choice, living arrangements and assets.  This information will be used to establish financial need and will determine eligibility for school based grants, scholarships and other aid as well as state and federal grants, loans and other aid.  Be sure to have a copy of yours and, if applicable, your parents tax returns for the previous year available when filling out this form.

Once your personal and family financial data, school information and financial need are gathered then you will receive a student aid report or SAR.  This report will be sent directly to the schools you have chosen and a copy will be sent to you via email.  This will determine your family contribution or EFC (expected family contribution).  Once that has been established then your eligibility for other forms of grants, scholarships, loans or other aid will be determined for you to choose.

The most common form of aid is typically direct student loans issued by the federal government.  There are student loans that are issued through private lenders or banks but typically the government loans have the best interest rates and repayment features.  Traversing this path can be tricky ground for any student stumbling through the financial aid maze for the first or even the 10^th time.  It is imperative to understand that grants and scholarships are free gifts based on academics, sports, need or other criteria.

Student loans are an important and often times necessary way to afford a higher education.  But keep in mind that loans are just that, funds on lend to cover school related costs and must be repaid in full.  Defaulting on student loans made in agreement with the federal government can lead to negative credit reports, garnishment of wages and/or seizure of banking accounts.  This is an agreement that must not be taken lightly.  Be sure that you understand what interest rate you are getting and all of the repayment options before accepting

Now that we’ve discussed the application process and the difference between grants and loans, here are the basic student loan types and descriptions.

• Direct Subsidized Stafford Loan is a loan that is dispersed based on eligibility need as determined by the FAFSA.  No interest is charged while a student is enrolled at least part time, is in a grace period or deferment period.
• Direct Unsubsidized Stafford Loan is a loan that is not based on financial need and interest is charged at all times.
• PLUS Loan-Federal parent loan for undergraduate students.  This is a federally guaranteed low interest loan that parents with good credit can take out to cover college related costs for their children.

Each student should start with the FAFSA application and work with the institutions financial aid office to best choose payment methods specifically tailored to each individual.

Student Loans:  Repayment, Deferment, Forbearance, Consolidation and Cancellation

Be sure to examine the options closely and request assistance immediately.  If a loan is allowed to go into default the repayment and payment hold options may not be available.

During repayment there are a few options that need to be carefully weighed:

• Standard Repayment:  Pay a fixed amount each month.  The loan must be paid in full within 10 years.  This option allows for the least amount of interest to be paid
• Extended Repayment: There must be at least $30.000 worth of debt to qualify for this repayment option.  The payments are structured over 25 years with either standard payments (the same amount every month) or graduated payments (starting out low and gradually increasing over the term of repayment).
• Graduated Repayment:  This plan is also a 10 year repayment plan but the payments start out low and increase every two years over the 10 year period.
• Income Contingent Repayment:  Under this plan the monthly payments are recalculated every year based on the adjusted gross income (AGI), family size and amount of loan debt.  If the payment isn’t enough to cover the interest, it is then capitalized each year but will not exceed 10% of the original loan.  The maximum length of payment period is 25 years.  If the loan is not paid in full at that time it will be discharged and penalty taxes may apply.
• Income Based Repayment:  This payment is based on income for a person experiencing partial financial hardship.  The maximum repayment period is 10 years.  Meeting certain requirements over a specified period of time may qualify for discharge or cancellation of any outstanding balance.

During the course of repayment it may be necessary to put payments on hold.  The Federal Government gives a few different options for this.  There are several different options to meet specific needs.

• Deferment:  A period of time when the loan payments are postponed.  If the loan is subsidized there will be no interest accruing during this time.  A deferment can be used during graduate school or fellowship.  It can also be used during unemployment or economic hardship and in some cases during active duty in the military.
• Forbearance:  If the loan is not eligible for a deferment then forbearance might be an option.  This allows for payments to be put on hold, decreased or extended.  Interest is still accrued on a loan in forbearance.
• Consolidation:  Loan consolidation lumps all loans over the course of the education into one lump payment.  This option will generate a lower interest rate and allows for the payment plan to be extended which can be a good thing if lower monthly payments are needed.  But be aware that extending payments will generate more interest being paid over the course of repayment.
• Cancellation:  There may be cancellation of repayment for teacher service, public service, school related discharges, disability, bankruptcy or death.

For an education major, an exchange for teaching in a low income school district may qualify the loan to be cancelled fully or partially, depending on the time period agreed upon for the teacher’s services.

Employment in certain public service jobs such employment with the family and child services agency, some nonprofit organizations, the military, public safety, emergency management and public health agencies are a few of the public service jobs which could be considered for this option.  Certain restrictions apply.

School related discharges apply if the school closed before the educational degree was completed, if the loan was signed falsely or if the loan was taken out but the student dropped the program before the semester began.

A loan may be cancelled if a permanent disability was sustained.  This must meet the requirements of a 3-year conditional discharge period and requires certification from a physician.

In some cases student loans may be cancelled in bankruptcy.  It is determined on a case by case basis and only if it is proven that repayment would cause undue hardship.

Finally, a loan will most certainly be cancelled if an original death certificate is presented, by an immediate family member,  to the Direct Student Loan Servicing Center.