Public Government Loans
The United States Federal Government has been involved in ensuring that its populace is well-educated by sponsoring many different types of student loans. Federal student loans have lower interest rates than private loans. These federal loans are available for students or parents. Most are needs-based.
The Federal government requires that students and parents fill out the Free Application for Federal Student Aid (FAFSA). It will be used to calculate a student’s eligibility for federal aid. The FAFSA looks like a tax form and is used to track the income and assets of parents and students. About 5% of parental assets will be expected to be used for the student’s school expenses. About 25% of the student’s assets will be expected to be used for the school expenses.
The government is making some changes to its loan programs. One change is that private banks won’t be responsible for lending government-backed loans to students anymore. Another change is the gradual phasing out of the FFEL and William Ford loans.
These are the primary government loans available:
+ Consolidation
+ Perkins
+ Plus
+ Stafford
The government is placing its Stafford, Plus, Federal Family Education Loan (FFEL), and Consolidation loan programs into the Direct Loan Program, which will be administered by the U.S. Department of Education.
a) Consolidation
The Federal Consolidation Loan allows students to combine different public and private loans together for one interest rate and monthly payment. It can lower the monthly payment by extending the length of the repayment period.
b) Perkins
The Perkins Loan is a fixed, low-interest loan (about 5%) aimed at students who demonstrate substantial financial need. The amount of the loan is based on funds available at the college. The college is the lender and determines the loan amount – usually after other financial aid has been determined. There is a six-month grace period for repayment after graduation. The student is given up to ten years to repay the loan. Payments are made to the college. Deferment provisions for unemployment and teacher cancellation programs are available. Perkins loans are for undergraduate or graduate study.
c) Plus
The Federal Plus Loan is made in the name of the parent, it requires a credit check. There is no needs test for qualification. The amount available is based on the Cost of Attendance (COA). A higher interest rate is charged. Repayment begins 60 days after disbursement. The Federal Government is the lender for the Plus loan and payments are made to the Federal Government.
d) Stafford
The Stafford loan is divided between the non-subsidized and subsidized loans where the government pays the interest on the subsidized loans. A student can qualify for both subsidized and unsubsidized loans.
The loan will be made in the name of the student, the subsidized variety is need-based and no credit check is run. The unsubsidized Stafford loans provide higher amounts of money with a higher interest rate. These loans are guaranteed by a private guarantor and backed by the government. Repayment begins after the student has left the school, does not satisfy half-time status, or has graduated.
Payments are made to the U.S. Government. Delayed payment and deferment provisions are allowed. There are both undergraduate and graduate Stafford loans.
Federal Family Education Loan Program
The Federal Family Education Loan Program (FFELP) is known to be the largest federal student aid program in the United States for higher education. These are managed through government or private non-profit agencies, and these agencies are known as the ‘guaranty agencies’ where the insurance of the program is handled. Millions of students are using the FFELP program to pay for their educational expenses because of its guaranteed security by the federal government. FFELP differs from Federal Direct Loan Programs (FDLP) in the sense that FDLP is directly provided by the government without the intervention of non-profit agencies.
FFELP how does it work?
Private financial institutions (banks, credit cooperatives, and loan and savings companies) lend money to families in cooperation with the federal government, thus offering low-interest rates. The cost of such loans is affordable for students and their families, and under certain economic and family circumstances the government even pays for some of the loan’s interest while the student is still studying (also called: a subsidized loan).
The federal government applies an initial charge of 3%, and the financial institution granting the loan can charge a maximum of 1%. Both charges are automatically deducted from the loan. Students, therefore, receive the granted sum minus these charges.
Every 1st of July the interest rates for student loans are reviewed and will be presented online. The rates are valid for one year.
What types of FFELP exist?
FFELP can take three different forms, respectively:
Subsidized Loans:
Under certain economic and family circumstances the government pays for some of the loans its interest while the student is still studying. To be eligible for this type of loan you will have to prove that you are in need to obtain this kind of subsidy; need to have applied for a Pell grant beforehand, and you must be either an American citizen or a foreigner with a permanent residence permit.
Unsubsidized Loans:
You pay for the loan its interest while you are studying. You can choose whether or not to defer interest repayment while studying. If interest repayment is deferred, when you finish university you must repay the whole accumulated interest plus the pending capital, according to the conditions agreed upon when the loan was granted
Federal Plus Loans:
Your parents can apply for a Federal Plus Loan covering the entire expense (tuition, administrative fees, books and materials, accommodation and meals, transportation) for your first university education. Any other government financial aid will be discounted from the sum granted. This is a federal government-guaranteed loan and it helps parents to cover their studies with a low-interest rate. There’s no need to prove a situation of economic need, but the university selected may ask you to apply for a federal loan in order to accept the student enrolment admission to the university. Parents need a good credit history and will be checked on unfulfilled repayment of other loans in the past.
We strongly advise you to consult your financial aid office at your high school or University to give you all the necessary information you need on choosing the right program that suits your financial needs. When you have already done this you can go to Free application for federal student aid (FAFSA) and apply online for governmental financial aid.
Subsidized Student Loans
The student loan in which the interest payments are subsidized is called A Subsidized Student Loan. In general terms, there is no interest payment for the student during the schooling time. There are no principal payments until after leaving school.
Definition:
The government actually pays the interest of a subsidized student loan while a student remains enrolled in college or university. This means that any interest that would have been added to a subsidized loan balance is essentially erased by the government.
Subsidized loans are often confused with Student loans that are in deferment. Throughout the student’s educational career, these loans still have the interest added to them, but until after graduation or withdrawal, no payments are due.
Throughout their college education, subsidized loans are generally reserved for students demonstrating financial need ongoing basis.
“Stafford” and “Perkins” loans are the most common Subsidized Student Loans.
The best and first choice for students looking to borrow money for education is The Subsidized Stafford Loan.
The Benefits of a Subsidized Stafford Loan:
- Low fixed interest rate, as low as 4.50%
- No payments while enrolled in school or in deferment.
- Acceptance is not based on credit.
- Eligible for a Subsidized Stafford Loan
- In order to be eligible for the subsidized Stafford loan, the following qualifications must meet by the applicant.
- US citizen or eligible non-citizen.
- Enrolled half-time more in an accredited academic program.
- Have completed FAFSA.
- Have completed the high school or equivalent.
- Not in default or delinquent on any existing federal loan.
Through the completion of the “FAFSA” student must show that they are severely lacking inadequate funding for college or university attendance, based on a low EFC (Expected Family Contribution).
No credit check is required to apply for Stafford Loan. Therefore students who can prove independence from a parent who may be eligible are without a credit history; however, while parents with that credit history are still eligible, having a high income disqualifies their student for subsidized student loans.
Whenever you want, you can pay off your federal loan. Your financial aid grant-wise for the following year will depend on income and assets available.
Students’ parents do not cosign subsidized federal loans. Cosigners are not required (or allowed) because federal loans are solely taken out in the students’ names. If a student loan went into default, his parents’ credit has taken a hit, if they cosigned a private loan. Especially since the student paid the loan off, the parents’ credit is not necessarily ruined. Unfortunately, this was a risk that students’ parents accepted when they cosigned the loan. Students’ parents should have been contacted for parents if students’ loans went into default. (Because they were just as responsible for the payments as a student was) Even if their credit took a hit, it can be built up again pretty.