Student Loans – low interest loans that must be paid back.
Student loans are often a large portion of a student’s financial aid package. For many people, accepting student loans is the first major financial decision of their lives. Student loans are long-term financial and legal commitments.
What is a student loan?
Colleges can offer students money to pay for college expenses in the form of a student loan. Parents can also apply for student loans to pay for their child’s college expenses. All loans must be paid back after a student graduates or drops below half-time student status. The following explanation details the student loan process.
How do I apply for a student loan?
When a student completes the FAFSA or a parent applies for a student loan, the Department of Education determines the maximum loan dollar amount a student or parent can receive. This information is then sent to the colleges listed on the FAFSA. As with grants, a college financial aid administrator reviews a student’s financial need, FAFSA, EFC, COA, and other factors when deciding what types of loans and the dollar amounts to offer a student. A college financial aid administrator cannot offer a loan amount greater than what the Department of Education has decided.
1. Borrower – the person legally responsible to pay back the loan.
2. Lender – the organization that provides loan money. This is also the organization you will be sending loan payments to.
3. Principal – the dollar amount owed to the lender. At the start of the loan, the principal is the original loan amount.
4. Interest rate – a percentage of the principal charged to a borrower each month. This is how a lender makes a profit from giving you a loan.
5. Master Promissory Note – a contract between the lender and borrower that legally obligates the borrower to repay the loan. This document lists the original loan amount, interest rate, and payment terms. 6. Accrue – to add interest on top of the principal loan amount each month.
7. Disburse – to send loan money from the lender to the college.
8. Grace period – the period of time when students are not required to make loan payments. This is usually after a student graduates or drops below full-time student status. Students are expected to find a job during this time period.
What is a Master Promissory Note?
A MasterPromissory Note is a contract between the lender and borrower that legally requires the borrower to repay the loan. This document lists the original loan amount, type of loan, interest rate, and payment terms. A simple example of loan terms is below.
Example scenario: College freshman music student, Steve Harris, accepts a Federal Perkins Loan of $10,000 listed on his Edward State University financial aid award letter. This loan has an interest rate of 5%, a nine-month grace period, and will be paid back over a 120 month repayment plan.
Borrower: Steve Harris
Lender: Edward State University
Type of Loan: Federal Perkins Loan
Interest rate: 5%
Payment terms: Student will make monthly payments for 120 months starting nine months after the student graduates or drops below half-time student status.
A master promissory note would be required after this student accepts the loan offered in his award letter.
How does loan money get to my school and to me?
The federal government provides the money for all federal student loans. Your college requests loan money from the U.S. Department of Education at the beginning of the fall and spring semesters. You will not have to request this to occur. The money is first used by the college to pay for tuition and fees. Students will receive any remaining money from the college by check. This money can be deposited into a personal bank account but must be used for other educational expenses. Using loan money for personal needs is not allowed. Students can be placed on a repayment plan if they are found to be using loan money for personal needs, like a vacation.
What kinds of student loans are available?
There are two kinds of
loans for students. One, federal loans that are funded by the federal
government. Two, private loans that are offered through a bank or loan company. Federal loans are discussed below.
Private Loans are obtained from a private bank or lending company. Each bank has a different way of deciding if a student qualifies to receive a loan. It is best to visit a few private banks or lending companies to see which offers the best loans and rates. Private loans often require another person to co-sign for the loan. A co-signer is a person that agrees to pay back the loan if the student cannot. To be approved for a private loan, the bank or lending company will review credit scores of the borrower and the co-signer. You may not need private loans if the college you apply to offers enough federal loans to cover the costs of college.
Federal Perkins Loan - for low-income students with exceptional financial need.
The lender for Federal Perkins Loans is your college. A college financial aid administrator will determine the loan amount you are eligible to receive. That loan amount is listed on your award letter. When the loan is accepted, the college will contact you to sign a master promissory note.
What is the maximum loan amount I can receive with a Federal Perkins Loan?
$5,500 each year as an undergraduate student.
What is the interest rate on a Federal Perkins Loan?
When do I pay back my Federal Perkins Loan?
You will start making payments nine months after you graduate or drop below half-time student status. The nine months before making payments is called a grace period. During this time, you will receive repayment information and be notified of your first payment due date. If you do not receive this information, you are still responsible for beginning repayment on time. Failing to make monthly loan payment on time will negatively affect your credit score and credit history.
Who do I make loan payments to?
You will make loan payments to your college.
Federal Direct Loan – for students
The lender for Federal Direct Loans is the U.S. Department of Education. A college financial aid administrator will determine the loan amount you are eligible to receive. That loan amount is listed on your award letter. When the loan is accepted by a student, the college reports the loan amount to the U.S. Department of Education. The U.S. Department of Education will contact you to sign a master promissory note.
There are two types of Direct Loans:
Direct Subsidized Loans
Direct Unsubsidized Loans
Subsidized Loan - If you are eligible for a subsidized loan, the government will pay the interest on your loan while you are in school and during your grace period. This is intended to help reduce your college costs. Subsidized loans are awarded on the basis of financial need.
You accept a $5,000 Direct Subsidized Loan at 3.86% interest.
The government will pay the interest on your loan each month you are in college. At the end of college, you will only owe the original $5,000 principal loan amount. You will start paying the interest on your loan after your grace period ends.
Un-SubsidizedLoan –The interest on your loan amount will continue to accrue each month you are in college. You will not be required to pay off the interest while in school, but each month the total principal amount you owe will increase. This results in owing more to your lender at the end of college than at the beginning.
You accept a $5,000 Federal Direct Unsubsidized Loan at 3.86% interest. After the first month of college you will accrue $28.33 in interest. You no longer owe the lender $5,000, you now owe them more. See the example below.
$5,000 + $16.08 = $5,016.08 Original First month’s New principal Loan Amount interest at 3.86% owed to U.S. Dept of Ed
After the second month of college you will accrue an additional $28.49 in interest.
$5,016.08 + $16.14 = $5,032.22 Principal from Second month’s New principal last month interest at 3.86% owed to U.S. Dept of Ed
After two months of interest the principal owed to the lender increased from $5,000 to $5,032.21. This process continues each month you are in college. You can make payments while in college to pay off the interest. That will decrease the principal owed to the lender at the end of college. The lower the principal owed at the end of college, the lower the monthly payment you will have for the next ten years.
What is the maximum loan amount I can receive with a Federal Direct Loan?
Dependent students with parents that were approved for a Federal Direct PLUS Loan: $5,500 first-year students $6,500 second-year students $7,500 third-year students and beyond
Dependent students with parents that were rejected for a Federal Direct PLUS Loan: $9,500 first-year students $10,500 second-year students $12,500 third-year students and beyond
Independent students: $9,500 first-year students $10,500 second-year students $12,500 third-year students and beyond
What are the interest rates on a Federal Direct Loans?
Direct Unsubsidized loan Direct Subsidized loan
3.86% 3.86% Are there any loan fees or charges to take out a Direct Loan?
Yes, there is a 1.051% fee charged to the borrower that is paid off through your regular monthly loan payment. When do I pay back my Federal Direct Loan?
You will start making payments six months after you graduate or drop below half-time student status, The six months before making payments is called a grace period. During this time, you will receive repayment information and be notified of your first payment due date. If you do not receive this information, you are still responsible for beginning repayment on time. Failing to make monthly loan payments on time will negatively affect your credit score and credit history. Who will I make loan payments to?
You will make payments to the U.S. Department of Education.
Direct PLUS Loans – for parents to help pay for their child’s education.
The lender for Direct PLUS Loans is the U.S. Department of Education.
How do I apply for a Direct PLUS Loan?
To apply for a Direct PLUS Loan, parents must contact the colleges their child applied to. Each college provides its own Direct PLUS Loan application, which is often available on-line. Complete the application and return it to the college. The college will submit the application to the U.S. Department of Education for loan approval. It is possible for a parent’s loan application to be rejected due to a poor credit history. Notification of loan approval status and maximum loan amount will be sent to the parent and the college.
What is the maximum loan amount I can receive with a Federal Direct PLUS Loan?
College financial aid administrators make the final decision on the amount of loan money to offer parents. This is a two step process that involves the U.S Department of Education.
1. The U.S. Department of Education will determine the maximum loan amount a parent is approved to receive. College financial aid administrators cannot offer parents a loan that exceeds this amount.
2. A college financial aid administrator will then subtract any financial aid offered to the parent’s child from the COA. This is the amount of loan money the college tries to offer a parent.
For example: $20,000 COA for Edward State University - $10,000 Total financial aid awarded to the parent’s child $10,000 Loan amount college’s try to offer parent.
In this scenario, if the U.S. Department of Education approved the parent for a maximum loan amount of $8,000, then the student would need to make other arrangements to find the remaining $2,000 needed to attend the college.
The Federal Direct PLUS Loan being offered by the college will be listed on the student’s award letter. Colleges also report the loan amount being offered to the Department of Education. It is expected that parents will accept the Federal Direct PLUS Loan listed on the student's award letter. When a student accepts the financial aid listed on their award letter, the Department of Education will request the parent sign a master promissory note.
Like with all student loans, the college will request disbursement of loan money usually at the beginning of the fall and the spring semesters. Loan money is first used by the school to pay for tuition and fees. Remaining money is mailed to parent by check from the college. Parents can also choose to have their student receive the remaining money. What is the interest rate on a Federal Direct PLUS loan?
When do I pay back my Federal Direct PLUS Loan?
Parents have two repayment options: 1. Repayment can begin sixty days after the loan money has been disbursed to the college.
2. Repayment can begin six months after the student graduates or drops below half-time student status.
With either option, parents are mailed repayment information and notification of their first payment due date. The parent is responsible for beginning repayment on time, even if the information fails to reach the parent. Payments are usually due monthly. Failing to make monthly loan payments on time will negatively affect your credit score and credit history. Who will I make loan payments to?
The U.S. Department of Education.
Loan Payment Calculator
Determining how much money to take out is an important step in planning for college expense. If you would like to calculate what your future loan payment, please visit this link provided by the FinAid.org: www.finaid.org/calculators/loanpayments.phtml