Student Federal Loans

Approximately 60% of students in the United States who attend college each year rely on student loans to pay for their education. Needless to say, a majority of the student loan borrowers who graduate are in a significant amount of debt when they enter the real world.  As time has progressed, tuition costs have only increased and jobs available have decreased. This equation has put a real burden on new and older graduates alike. The scenario has resulted in an extreme debt ratio for unpaid student loans in the U.S.A.

There are several types of student loans available, but all fall under two categories: federal and private loans. Federal loans (aka: government student loans) are guaranteed by the U.S. Government. Therefore, this type of loan is available at a much lower interest rate than a private loan. Payments are made payable to the student borrower directly. No payments are due until six months after graduation unless the individual’s class schedule drops below half-time. Once the student is no longer enrolled in classes at least part-time, the six month student loan grace period is revoked and payments become due immediately.

The Stafford Loan is the primary federal student loan and is available as both subsidized and unsubsidized loans. Subsidized loans are for students who qualify for interest free loans while they are enrolled in school and also during any grace or deferment period. The U.S. Government covers the cost for the interest until the student either graduates or drops out (and during any eligible grace or loan deferment).

Unsubsidized loans are student loans without help from the government on the loan interest. The student loan interest starts to accrue from the beginning of the initial loan and is deferred until six months following the borrower’s graduation, or when a student’s class schedule falls below half-time.  Stafford Loans include strict eligibility requirements and more limited funding.

Both subsidized and unsubsidized student loans are guaranteed by the U.S. Department of Education. A person’s credit score or other financial circumstances are not taken into consideration when applying for federal loans. Awarded loan amounts and interest rates are predetermined by the U.S. Congress and when the loan is originally disbursed.

It is common for undergraduate borrowers to receive lower interest rates while graduate students usually are granted a higher loan amount. For example, the maximum amount available to an undergraduate student is $57,500 for subsidized and unsubsidized loans (combined).

The Federal PLUS Loan (aka: “Parent Loan for Undergraduate Students” or “Parent Student Loans“) is available to parents of students. These loans usually offer higher loan amounts and payments begin instantly. There is no grace period. Parents take on the financial responsibility of the Federal PLUS Loans (not the student). It is not a co-signer situation. The loan agreement is created between the loan lender and the parent directly, so if the repayment terms are not met – it will be the parent’s credit rating which will be negatively affected.

STAFFORD LOANS DISBURSED:
Interest Rate
Prior to July 1, 2006
8.25% CAP
On or after July 1, 2006
6.8%

To undergraduates between

July 1, 2008 and June 30, 2009
6.0%

To undergraduates between

July 1, 2009 and June 30, 2010
5.6%

To undergraduates between

July 1, 2010 and June 30, 2011
4.5%

To undergraduates between

July 1, 2011 and June 30, 2012
3.4%
To Undergraduates after June 30, 2012
6.8%

A Federal Perkins Loan is offered by the U.S. Department of Education to college students on an as needed-based basis. These loans hold a fixed interest rate of 5% for a ten year period. Unlike the Stafford Loan, the Perkins Loan offers borrowers a 9 month grace period following graduation; falling below half-time status or withdrawing from school all together.

The Perkins Loan is a subsidized loan, so interest does not begin accruing until loan payments become due. Perkins Loan limits for undergraduates are capped at $5,500 per year with a lifetime maximum of $27,500. Graduate students are capped at $8,000 per year with a life-time maximum of $60,000 (this amount also includes any loans the graduate student received during their undergraduate studies).

Perkins Federal Loans also offer loan forgiveness (aka: a Federal Loan Cancellation) on a certain percentage of the loan amount for teachers who work in low income area schools and Peace Corps volunteers. A percentage of the loan amount is forgiven for each year the borrower taught or volunteered full-time.

Loan forgiveness (aka: cancellation) percentages vary per year based on the original loan amount:

Cancellation

Amount Year 1

Cancellation

Amount Year 2

Cancellation

Amount Year 3

Cancellation

Amount Year 4

Cancellation

Amount Year 5

15%

15%

20%

20%

30%