Types of Student Loans — Federal Loans, Federal Family Education Loan
Last Updated: October 3, 2017
Many parents are finding it harder and harder to pay for their child's higher education. If you have children in high school who are just about ready to graduate, you are probably already thinking about how you are going to pay the tuition. Tuition rates seem to go up every year and no longer is it cheaper to have your child attend an in-state college. Applying for scholarships and grants is great, but not all students will get money this way. Applying for and taking out a student loan may be your only course of action.
Buried deep in the bowels of the health care reform package that was passed in 2010, are provisions that were meant to shake up the student loan industry. In a nutshell, this reform is cutting out the middleman (banks and lending institutions) and all colleges must arrange for students to take their federal Stafford loans directly from the government. What does this mean to you?
- Undergrads can continue to be eligible to borrow Stafford funds of at least $5,500 and up to $12,500.
- Interest rates cannot exceed 6.8 percent a year.
- Graduate students can continue to borrow their full cost of attendance through the Grad PLUS program at an interest rate of no more than 7.9 percent a year.
- Starting with federal loans taken out in 2014, future grads will be able to sign up for an "income-based repayment" plan that will cap their monthly payments at 10 percent of their income.
- The reform will also enable the federal government to raise more money to fund bigger Pell Grants.
Types of Student Loans
Like any other loan, student loans are borrowed money that must be repaid with interest. Both undergraduate and graduate students may borrow money. Parents may also borrow to pay education expenses for dependent undergraduate students. Maximum loan amounts increase with each year of completed study. There are three main types of federal loans:
- Federal Stafford Loans
- Subsidized Federal Stafford Loan. This loan is long-term and need-based, with a low-interest rate. The term "subsidized" means that the government will pay the interest on the loan while a student is in school or when the student requests a grace period or deferment.
- Unsubsidized Stafford Loan. This loan is long-term, non-need-based, with a low-interest rate. This type of loan is best for students who don't qualify for other types of financial aid, or who still need more money in addition to other forms of financial aid. Almost all household incomes qualify, and "unsubsidized" means that the interest on the loan is the responsibility of the borrower.
- Federal Plus Loans. These loans are available to parents whose children are attending college as full or half-time undergraduate students. They are awarded based on credit history and cost of attendance. The interest is low on this type of loan, but repayment usually begins within 60-90 days after full disbursement of the loan, or after the student graduates.
- Federal Perkins Loans. Perkins loans are awarded to students based on extreme financial need, and usually have very low interest rates. The total funds available to be disbursed for these loans is limited, however, which means that the amount of the loan will likely be relatively low.
You must meet these requirements to receive aid from any Federal Student Financial Aid programs:
- Be a U.S. citizen or eligible noncitizen of the United States with a valid Social Security Number;
- Have a high school diploma or a General Education Development (GED) certificate or pass an approved "ability to benefit" test;
- Enroll in an eligible program as a regular student seeking a degree or certificate; and
- Register (or have registered) for Selective Service, if you are a male between the ages of 18 and 25.
How to Apply for a Student Loan
1. Complete the FAFSA (Free Application for Federal Student Aid). The FAFSA lists deadlines for federal and state aid. Check deadlines! Schools and states may have their own deadlines for aid.
You must fill out a new FAFSA for each year you plan to be enrolled in school. The best time to apply for aid is between January 1 and March 1, since most schools award aid on a first-come, first-served basis. About six weeks after you submit your FAFSA, you will receive a student aid report that will give you an opportunity to correct previously reported 'incorrect information' before the form goes from the Department of Education to your school.
You may get a FAFSA from:
- a high school guidance office;
- a college financial aid office;
- a local public library;
- the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243); or
- you can apply online at: fafsa.ed.gov.
2. One to four weeks after you submit your FAFSA, you will receive a Student Aid Report (SAR). The report confirms the information reported on your application and will tell you your Expected Family Contribution (an amount you and your family are expected to contribute toward your education, although this amount may not exactly match the amount you and your family end up contributing).
3. Contact the school(s) you are interested in attending and talk with the financial aid administrator. They will review your SAR and prepare a letter outlining the amount of aid (from all sources) that their school will offer you.
4. Figure out what other forms you need to complete:
- Some colleges have their own institutional forms, in addition to the FAFSA.
- Some colleges require the CSS/Financial Aid Profile to apply for non-federal aid. You can apply online and learn more at CollegeBoard.com.
When in Doubt, Fill Out the FAFSA Anyway
Even if you don't think you're eligible for federal assistance, definitely fill out the form, because the FAFSA is used by many non-government aid programs in order to determine your eligibility for the scholarships, loans, and other programs they offer.
Here are the items you need to help you fill out the application:
- Social security card and driver's license.
- W-2 Forms or other records of earned-income along with your federal income tax return (and your spouse's, if you are married). You'll need IRS Form 1040, 1040A, or 1040EZ and any 1099 forms you received.
- Your parent's federal income tax return. (unless you are filing as independent)
- Records of other untaxed income you received, including AFDC or ADC, child support, welfare benefits, social security benefits, TANF, veteran's benefits, and military or clergy allowances.
- Current bank statements, mortgage information, and records of stocks, bonds, and other investments.
- Medical and dental expenses for the past year that weren't covered by health insurance.
- Your business or farm records, if applicable.
- Your alien registration card (if you are not a U.S. citizen).
Expected Family Contribution
The EFC is a measure of your family's ability to pay for college based on student and parent income and asset information, your state of residence, household size, and number of household members in college. You can request a free copy of the EFC Formula by calling 1-800-4FED-AID and requesting the current SFA Handbook.
Since you most likely don't have a copy of the above booklet in your hands, we will attempt here to briefly explain how the EFC is calculated. The EFC is the sum of the student contribution and the parent contribution. Some schools (mostly private) expect both natural parents to contribute to their children's educational expenses, regardless of a divorce or any court orders to the contrary. In cases of divorce where the custodial parent remarries, the financial information for both the custodial parent and the step-parent must be included on the FAFSA as well as any child support and/or alimony received from the non-custodial parent.
The calculation of the expected student contribution is generally 35 percent of the student's assets and 50 percent of the student's prior year (including summer) earnings. (The federal calculation is 50 percent of the net earnings above $2,200 and 35 percent of the student's reported assets.)
A few things to note about the needs assessment formula: (1) student assets are assessed more heavily than parent assets; (2) student income is assessed more heavily than parent income; and (3) in most cases the EFC will go down when the number of family members in school goes up.
The school you attend establishes a Cost of Attendance (COA). The school's COA will include tuition, fees, room and board, books and supplies, travel, and personal and incidental expenses. In many cases there is a standard fixed budget amount for some of these categories. But the budget amount for travel may vary depending on the student's home state. Likewise, room and board expenses may be reduced and travel expenses increased for commuter students.
How to Qualify as an Independent Student
If you are classified as an independent student, only your (and your spouse's) income and assets are considered. To qualify as an independent student, you must meet at least one of the following criteria:
- be at least 24 years old;
- be an orphan;
- have a dependent other than a spouse;
- be a graduate or professional student;
- be a veteran of the Armed Forces;
- be married;
- be a ward of the court.
Eligibility for Student Loans
As you can see from the definitions given above, the COA and the EFC may be different for every school. However, once these are calculated, every school uses the same formula to determine how much Federal financial aid to award to students:
COA - EFC = Financial Need
In order for you to receive need-based aid, your COA must be greater than your EFC.
As you probably have guessed, most schools only have money to help out the most needy of students. The financial aid office at your school will use the need-based resources they have available to try to meet your Financial Need.
Student Loan Default Information
Unfortunately, many students find themselves in the terrible position of defaulting on their student loans. Because of this, student loan borrowers in default now have more options than ever before to repay their student loans.
When is a Loan Considered in Default?
For student loans authorized under Section 435(i)Title IV of the Higher Education Act, default occurs on a FFEL loan after a default has persisted for 270 days in the case of a loan repayable in monthly installments or 330 days in the case of a loan repayable in less frequent installments. The change is effective for loans for which the first date of delinquency occurred on or after October 7, 1998. During the delinquency period, the lender must exercise "due diligence" in attempting to collect the loan; that is, the lender must make repeated efforts to locate and contact you about repayment. If the lender's efforts are unsuccessful, it will usually take steps to place the loan in default and turn the loan over to the guaranty agency in your state. Lenders may "accelerate" a defaulted loan, which means that the entire balance of the loan (principal and interest) becomes due in a single payment.
If the loan is placed in default, the loan is then turned over to the U.S. Department of Education (ED).
Which Type of Loan Do You Have?
Federal Family Education Loans (FFEL) - These include Federal Stafford and Federal PLUS loans. When placed in default, these loans are first assigned to a guaranty agency (an organization that administers the FFEL Program for your state) for collection. Periodically, guaranty agencies assign loans to ED for collection.
Direct Loans - Federal Stafford and PLUS loans are also offered through the William D. Ford Direct Loan Program. When placed in default, these loans are assigned to the ED's Debt Collection Service.
Federal Perkins Loans - When placed in default, Perkins Loans may remain with the school or be assigned to ED for collection.
If you are not sure what type of loan you have, check your promissory note. If your loan is not one of the loans listed above, the information listed above does not apply to you.
Repaying Student Loans Held by the U.S. Department of Education
If you default on your student loan, the maturity date of each promissory note is accelerated making payment in full immediately due, and you are no longer eligible for any type of deferment or forbearance. However, all guaranty agencies and the ED will accept regular monthly payments that are both reasonable to the agency and affordable to you.
If your defaulted student loan is held by ED, you should establish a repayment arrangement with Debt Collection Service or the collection agency currently administering your account on behalf of ED. Failure to repay the loan may lead to several negative consequences for you:
- The U.S. Treasury may withhold your payments toward repayment of your loan.
- You may have to pay additional collection costs.
- Also, you may be subject to Administrative Wage Garnishment, whereby the Department will require your employer to forward 10 to 15 percent of your disposable pay toward repayment of your loan.
- Federal employees face the possibility of having 15 percent of their disposable pay offset by the Department toward repayment of their loan through the Federal Employee Salary Offset Program.
- The Department may take legal action to force you to repay the loan.
- Finally, credit bureaus may be notified, and your credit rating will suffer.
In addition, you may not receive any additional Title IV Federal student aid if you are in default in any Title IV student loan.
Statute of Limitations on Student Loans
By virtue of section 484A(a) of the Higher Education Act, statute of limitations of no kind now limits ED's or the guaranty agency's ability to file suit, enforce judgments, initiate offsets, or other actions, to collect a defaulted student loan. Regardless of the age of the debt, statutes of limitation are no longer valid defenses against repayment of a student loan.
To obtain more information and to download student loan default forms, go to the website ed.gov.
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