Credit Infocenter
Call Lexington Law 800.461.0524 for a FREE Credit Repair Consultation

Types of Student Loans — Federal Loans, Federal Family Education Loan

Written by: Kristy Welsh

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?

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:

You must meet these requirements to receive aid from any Federal Student Financial Aid programs:

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:

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:

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:

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:

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:

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.

Online Information

To obtain more information and to download student loan default forms, go to the website

Contact Sallie Mae

Fax: 800-848-1949

P.O. Box 9500
Wilkes Barre, PA 18773-9500

Call 800.461.0524 and speak to a Credit Repair Expert at Lexington Law
Have Questions About Credit Repair? Get Answers with a FREE Consultation
Free Credit Repair Consultation & FICO® score from Lexington Law