The Ins and Outs of Federal Student Loans
With the high cost of a college or university education today, more students are being forced to borrow funds in order to attend. Yet, while a student loan can help you get your degree, the borrowed funds must be repaid – often with the initial payment being due soon after graduation.
A student loan may come in many different forms. Some are based on the student’s actual financial need, and others are similar to many other types of loans where qualification is based primarily on the borrower’s credit history and score.
For many students, obtaining federal student aid can provide a good solution. One reason for this is that federal student loans are known for offering low rates of interest – essentially keeping payments lower when the time comes to repay.
How to Obtain a Federal Student Loan
There are two primary methods of obtaining a federal student loan. These include applying for a loan directly through the U.S. Department of Education, or applying for funds via a private lender that is a member of the government’s Federal Family Education Loan program.
Each of these types of loans will carry the same rate of interest. In addition, the maximum amount that may be borrowed, as well as the factors that are considered for eligibility, are the same for each as well. The key difference between the two types of loan lies in how repayment of the funds is handled.
In both cases, the funding goes directly to the college or university where you are attending. Therefore, you will not actually receive the funds personally. After your school determines what you owe in terms of tuition and fees, as well as any other related charges, it will subtract the amount of grant money or other financial aid that you are receiving in order to come up with the amount that you still owe.
It is this amount that will be taken from your student loan funds. Should there be any funds left over from your student loan, you will receive such funds in the form of either cash or check, or the funds will be deposited directly into your bank account.
Because it may be tempting to spend the remaining funds, you may also have the option of leaving your surplus student loan money with your college or university to be used the following year.
Types of Student Loans
When considering a government student loan, there are three primary types that are available. These are:
- Perkins Loan – With a Perkins loan, the college or university is also actually the lender of the borrowed funds. The funds are obtained by the college or university via a pool that is both established and funded by the U.S. government. Qualification for these loans is based upon student need. The interest rate and terms are typically very favorable on Perkins loans. In addition, if a student ends up working in a public sector job such as teaching or civil service, he or she may be able to have their loan balance cancelled.
- Stafford Loan – Stafford loans also offer a low interest rate, and they are strictly regulated by federal rules. Unlike a Perkins loan that is based on the need of the student, a Stafford loan may be applied for by nearly any student. Such loans are disbursed directly or via the Federal Family Education Loan program.
- PLUS Loan – A PLUS loan is not borrowed by a student, but rather by his or her parents. These loans have many similarities to a more traditional commercial loan in that eligibility is based on the strength of the borrower’s credit. The maximum amount that may be borrowed hinges on the cost of the college or university where the student is attending. The interest rates on a PLUS loan are typically higher than those for Stafford and Perkins loans. PLUS loans may be used for paying undergraduate or graduate educational expenses.
Should a student be unable to obtain funding through any of the above government related sources, they may wish to seek financial assistance via a private student loan source such as a bank or credit union.
The Bottom Line
Prior to applying for student loan funds, there are several factors to keep in mind. First, make a determination regarding which type of student loan will best fit your specific situation. In addition, get a clear idea of exactly how much funding you will need. In doing so, you will be in a much better position to save money on loan repayment – both in principal and interest – over the long term.