Students and families are often confused
with the variety of options available when it comes to
financing a college education. There are a myriad of
options, from college scholarships and grants to federal
and private student loans -which student
loan?
As
part of the Higher Education Act of 1965, President Lyndon
Johnson created this law which was intended "to strengthen
the education resources of our college and universities and
to provide financial assistance for students in
postsecondary and higher education." This increased all
sources of federal funding provided to universities and
added in grants and other forms of financial aid. But which
student loan?
The
Federal Stafford Loan is available to both undergraduate
and graduate students enrolled at least half-time at a
college or university accepting federal aid. This is a
need-based program in which undergraduates may borrow up to
$5,500 per year in subsidized funds based on academic level
and graduate level students may borrow up to $18,500 per
year (up to $8,500 in subsidized funds and the remainder in
unsubsidized funds). The funds are sent directly to the
school and are applied to the student's account. To ease
the financial burden and know which student loan, payments
are not required until six months after the student
graduates. When looking to apply for a Stafford Loan,
students should see what types of borrower benefits each
lender is offering. As these student loans are all fixed at
the same interest rate set by the U.S. Government, lenders
are offering incentives to borrow by way of discounts, such
as waived fees, rate reductions for early payment and cash
back.
Which
student loan? While a Federal Stafford Loan is certainly a
necessary start, it doesn't always cover the entire cost of
education. A Parent PLUS Loan is a common way that parents
contribute to their child's education. This credit-based
loan allows parents to borrow the total cost of
undergraduate education including tuition, room and board,
supplies, college fees and more, minus any other aid
received. Once the loan has been put into the student's
account at the school, repayment begins shortly thereafter,
at which time the student loan consolidation process can be
performed. At a fixed interest rate, the Parent PLUS Loan
is an easy and cost effective solution to help bridge the
gap between Stafford Loan funding and the cost of
education.
For
many years, graduate students were only given Stafford
Loans as a federal loan option for funding their often
costly education. The difference was made up through home
equity, savings, salaries and private loans. However, which
student loan, the Graduate PLUS Loan is a new product that
became available to graduate students in 2006. Graduate
students with good credit can apply on their own signature
for a loan up to the cost of education, minus any other aid
received. The Graduate PLUS Loan can be applied to tuition,
room and board, education supplies, lab and travel
expenses. The interest rate is fixed and payments are not
required while enrolled in school. Upon graduation,
borrower benefits kick in to help students save money
during repayment. Or a student may save even more by
consolidating this loan using the federal loan
consolidation program. The Graduate PLUS Loan truly
provides graduate students with a great option to making
their graduate education dreams a
reality.
The
Perkins Loan is another federal loan available to both
undergraduate and graduate students offered on the basis of
financial need, other aid received and availability of
funds at each school. The federal government lends schools
funds for distribution to its neediest students. The
school, therefore, is the lender, and undergraduates may be
awarded up to $4,000/year and graduates may be awarded up
to $6,000/year. These loans need to be repaid directly to
the school and have a fixed 5% interest rate since the
program was started. Students can take advantage of a
nine-month grace period and a ten-year repayment term.
However, if consolidated with any existing federal student
loan, which student loan, including Stafford or Graduate
PLUS Loans, this can extend the repayment term.
Consolidation has been mentioned a few times and it's
really in the best interest of students to take advantage
of this upon graduation. Each federal loan, on its own, has
a 10 year repayment term, regardless of total loan debt.
Consolidation fixed the interest rate and extends the
repayment term, allowing more time to repay an often hefty
federal loan debt.
Named
for Senator Claiborne Pell, the Pell Grant was established
to provide funds that don't need to be repaid directly to
the neediest students. This is because it is a grant and
not a federal student loan. However, like the Stafford and
Perkins Loan, eligibility is based on need, as determined
by the cost of attendance and expected family contribution.
Since 2003, the maximum Pell Grant award has been $4,050
per academic year. However, due to the rising cost of
education, many question why the Pell Grant award has not
also increased. The Pell Grant covers, on average,
one-third of the yearly cost of education at a public
four-year institution. However, twenty years ago, it
covered close to 60%. On February 15, 2007, in an attempt
to slowly combat this issue, President Bush signed
legislation into law that would increase the Pell Grant to
$4,310 for the 2007-08 academic year. The following year,
the grant will increase to $4,600 and up to $5,400 by the
year 2012. These advances are certainly helping students
and families fund the cost of education, especially as
tuition costs continue to rise
Private student loans have gained
popularity over recent years as federal funding hasn't
quite met the entire cost of education. There are many
other costs associated with education, besides just
tuition. Commuting students need to cover transportation
costs somehow. City campuses don't always guarantee
housing, which forces students to find an off-campus
apartment, often with high rent costs. Which student loan?
There are costly textbooks to purchase, lab supplies and
flights home that aren't always covered by traditional
financial aid. Private loans originate to students by a
bank or other financial institution, unlike federal loans.
Private student loans also offer similar benefits to
students as a federal loan, such as deferred payment until
graduation, different loan repayment terms, and borrower
benefits. The interest rates on private loans vary from
company to company and are, usually, on a basis of credit.
Co-signers are a great way for a student who may have
limited or no credit at all to get this loan. Because of
the varying private loans available, most parents and
families "shop around" until they find their ideal
solution.