Once the Department of Education completes the evaluation of the applicant’s FAFSA, and determines the Financial Need amount available to an applicant, a Student Aid Report, or SAR, is issued to the applicant. The SAR contains the EFC. There are options for requesting a review of the Financial Need determination.
Once the applicant has qualified for a student loan, the student and his/her family must decide on what type of loan is best for their situation. Loans are differentiated by amounts, whether interest payments are subsidized or not, and the funding source of the loan. Loan amounts must also be evaluated in terms of what other financial assistance is available to the applicant.
Direct Loans are student loans made directly by The Department of Education (“DOE”) to students and the parents of students. No banks or financial institutions are involved. There are four types of direct loans offered by DOE:
Subsidized Stafford loans eliminate interest payments while the student is enrolled in school and during the six-month grace period following graduation before re-payment of the loan begins. These are available only to Independent Students.
Unsubsidized Stafford loans charge interest on the loan principle from the day the loan is issued. Repayment of the loan doesn’t start until six months after the student has either graduated or left college. But like a credit card balance left unpaid, the interest adds up each and every day the student attends school.
PLUS loans are available to students in graduate or professional school or to the parents of undergraduates.
The amount of money available through Stafford loans varies with each year of college.
College Year Amount of loan available
Freshman $ 3,500.00
Sophomore 4,500.00
Junior 5,500.00
Senior 5,500.00
All of the above amounts are for Dependent Students. The amounts for Independent Students are greater, but since very few applicants qualify for Independent Student status they are not included.
Interest rates and loan fees charged on Direct Student Loans are set by Congress. Interest rates are adjusted once a year, on July 31st. Current Stafford loan rates are 6.8% and loan fees are 4%.
The PLUS Program, or Parent Loans for Undergraduate Students, is a distinct and separate type of educational loan, which can be used to finance an undergraduate education. Because Stafford loans have limits that fall below the needs of many students, Stafford loans may need to be supplemented by PLUS loans obtained by their parents. Parents may apply for Direct PLUS loans from the DOE or from a second source of loans guaranteed by the DOE but funded by private banks and financial institutions. These loans are labeled FFEL or Federal Family Educational Loan Program.
PLUS loans carry a higher interest rate, currently 7.9% if the loan is a Direct loan from the DOE, and 8.5% for FFEL PLUS loans made by private banks or financial institutions. PLUS loans require separate applications available from the financial aid office of the student’s school. PLUS loans require good credit ratings and are subject to a more rigorous financial scrutiny than Stafford loans. PLUS loans carry origination fees like every other type of consumer loan. PLUS loans allow parents to borrow up to the complete cost of their child’s four years of college, less any other Direct loans or financial aid received.
Direct Plus loans are fairly straightforward. FFEL PLUS loans are made with private lenders. FFEL loans are guaranteed by the government, which means that the government agrees to, in effect, co-sign the loan. For this reason just about every type of financial institution offers PLUS loans. Most of these institutions are legitimate, but there are some predatory lenders. Caution must be exercised when choosing a lender. The Financial Aid Office of your child’s school should, in theory, be able to guide you to an honest lender. But there have been some scandals involving conflict of interest on the part of school financial aid departments, so independent investigation of lenders is a good idea.
Investigating PLUS loan lenders is much like investigating credit card offers. Some cards offer a low introductory rate, but the fine print shows that even one late or missed payment results in a skyrocketing interest rate. Other fine print reveals that a late or missed payment, even for a different credit card, can cause massive interest increases and penalties. For the period 2005 – 2006 student loans of all types amounted to over four hundred billion dollars. After home mortgages and credit cards, student loans are the larger source of business for the personal finance industry.
Terms for loans vary from ten to twenty-five years. But since interest is accruing from the moment the loan is made, interest charges are accumulating from fourteen to twenty-nine years. The amounts add up quickly. Applicants receiving federal student loans are now required by the government to take a financial counseling class before the money is released to the student. It makes sense to investigate financial aid that doesn’t require repayment.
