The I.O.U. Degree: FAQs About Student Loans
Kristin Baird Rattini
Financial aid shouldn't be a guessing game. Yet a recent study titled "Big Loans, Bigger Problems" conducted by
the United States Public Interest Research Group (US-PIRG) found that most students take out student loans without
a clear understanding of their cost. In fact, 78% of college students surveyed underestimated the total cost
of their loans by more than $4,800.
College freshmen need not go into the first major financial commitment of their lives with blinders on. By
diligently researching their student loan options and obligations, students can ace one of the most important
exams of their college years: the challenge of managing their student loans responsibly.
Here are some frequently asked questions to help students familiarize themselves with their student loan
options and responsibilities.
How do I apply for student loans?
To determine eligibility for most types of financial aid,
including federal loans, students and their parents must fill out the Free Application for Federal Student Aid
(FAFSA). The form requires information about the family's income, assets, and taxes paid. The government then
crunches the numbers to determine what the family can afford to contribute toward education expenses.
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Talk to a credit union loan officer about student loan options.
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The FAFSA should be filled out as soon as possible after Jan. 1 of the student's senior year of high school.
"Some schools have very early priority dates in February and March for determining financial aid, so parents need
to plan in advance and prepare their tax forms early," says Edward Schroeder, director of financial aid at the
University of Arkansas-Fayetteville. "You'll need to know, 'What is your adjusted gross income? What is your
tax liability? What's your number of exemptions?' If you put off filing taxes for too long, it could jeopardize
getting financial aid."
Some private colleges may require additional forms; contact the school's financial aid office for
information.
What are the most common federal student loans?
The Perkins loan and subsidized Stafford loan
are need-based loans. They're offered only to students whose college costs will greatly exceed their ability to
pay. The government pays all the interest on the loan—or subsidizes the loan—while the student attends
school at least part time.
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Student loans have their own fine print to consider and compare.
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The unsubsidized Stafford loan is available to almost all students. Since it is unsubsidized, interest starts
accruing as soon as the funds are paid out.
The federal PLUS loan, offered to parents with dependent students, is a credit-based loan. To qualify, parents
can't have any negative marks on their credit record, such as a bankruptcy or history of slow payments.
For each type of loan, the dollar amount available and interest rates will depend on the student's year in
school and whether he or she is considered dependent or independent by the Internal Revenue Service.
Click here
for the details.
The interest rate on my federal loans will be the same from every lender; why should I shop around?
"The interest rates are set by the government every July 1, but lenders offer different payment incentives
that can knock hundreds or thousands off what the students have to repay," says Kal Chany, president of Campus
Consultants in New York and author of
"Paying For College Without Going Broke" (ISBN 0375762116).
"Some lenders offer a quarter-percent deduction off your interest rate if you make electronic
payments. Some reduce your interest rate if you pay on time for a certain number of months. Some lenders will
forgive origination fees for on-time payments. There are a host of incentives, so it pays to shop around for
lenders."
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Private, or alternative, loans are available from a number of sources.
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If a college participates in the direct-lending program, its students won't have a choice of lenders. They will
borrow directly from the government, through the school.
However, two-thirds of schools participate in the Federal Family Education Loan (FFEL) Program, which simply
means that students can take out their loans through any authorized lender. So check out your credit union and
other lenders for the best deal.
The federal loans didn't cover all of my expenses; where should I look for additional loans?
Private, or alternative, loans are available from a number of sources, including your credit union. Your school
can help you find a lender that makes alternative loans.
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Lenders offer payment incentives that can knock hundreds off what the students have to repay.
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As for parents, "There are options out there," says Mike Darne, director of business development for Sallie
Mae. "They can use savings. They can take out a home equity loan or line of credit, which usually is tax
deductible." A few lenders also now offer an educational line of credit. Like a home equity loan, the line of
credit establishes a maximum that you can borrow—say, $20,000—and allows you to draw on it as needed,
withdrawing money incrementally and paying it back with interest.
Students should be diligent in their search for loan sources. Jason Sutton, a senior at Texas Christian
University in Fort Worth, Texas, learned about a private loan source through a posting in the employee break room
at his part-time job at JC Penney. "There are other loans out there," he says. "You just really have to go seek
them out."
What questions should I ask as I compare lenders?
Like car loans or credit cards, private
student loans have their own fine print to consider and compare. In "Paying For College Without Going Broke,"
Chany offers this check list of items to compare:
Interest rate: What is it? How is it determined? Variable or Fixed? Is there a cap?
Fees: What origination fees are charged?
Co-signer: Is a co-signer permitted or required? Will a co-signer affect the terms of the loan?
Repayment: What are my options? Is there a penalty for prepayment? How long will it take to pay off the loan?
When will I have to repay my loans?
"Some students are surprised they do have to repay,"
Schroeder says. "They've never had experience with loans before."
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Students and their parents must fill out the FAFSA form to apply for financial aid.
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On federal loans (Stafford, Perkins) that students take out, repayment begins either six or nine months after
you graduate, withdraw, or attend school less than part-time. On the PLUS loan, parents must begin repayment
within 60 days of final disbursement. Private loans may require payment on the interest while in school; check
with the lender for terms.
You'll likely have several repayment plans to choose from. Eighty percent of borrowers choose the standard
10-year, equal-installment repayment plan. "You don't want to extend the life of the loan if you can avoid it,"
Chany says. "The standard repayment option is your quickest and cheapest way to pay off your student loans."
Published December 3, 2001
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