Student Loans: A Primer
Posted on May 26, 2006 10 Comments
Based on my latest rant about student loans, an anonymous reader posted this question:
Q: I’m an avid reader of your blog and I appreciate your sound ability to put the financial jargon in lamen’s terms. But your current blog does not apply to me yet, so I was wondering if you could lead future university students like me that are getting no financial help from parents or relatives to make good decisions on taking out a student loan. Where do I start researching and what I’m looking for is where I’m stuck. Thanks again for all the help you’ve given and I look forward to your response.
Well, it’s been a long time since I’ve actually thought about applying for student loans, so I asked someone much more qualified to answer the question. That would be Mark Kantrowitz, publisher of www.finaid.org, an award-winning Web site that’s the most comprehensive annotated collection of information about student financial aid on the web. Here’s Mark’s answer.
A: “If your parents are not providing any financial help, at least try toconvince them to complete the Free Application for Federal Student Aid(FAFSA), http://www.fafsa.ed.gov/. Completing the FAFSA does not obligate themto provide you with financial assistance, but is a prerequisite for you to obtain federal student aid, such as the Federal Pell Grant,Federal Perkins Loan and Federal Stafford Loan. Talk to your college’s financial aid administrator, as they can sometimes intervene with your parents and convince them to complete the FAFSA. (FinAid.orgalso has a collection of tips for students in this situation.)
If your parents still refuse to or cannot complete the FAFSA, ask your school’s financial aid administrator about a dependency override. Parent refusal to help and student self-sufficiency are not sufficient grounds for the school to grant a dependency override, but sometimes there are unusual circumstances behind the parent refusal that may allow the school to grant a dependency override. If the school grants you a dependency override, you become an independent student and parent information is no longer required on the FAFSA. This will not only allow you to qualify for federal student aid on your own, but also increases the loan limits on the Federal Stafford Loan.
To choose the best loan, focus on the loans with the lowest interest rates and fees. The cheapest loan is the Federal Perkins Loan, with a fixed rate of 5.0%. Next is the Federal Stafford Loan, at 6.8%, followed by the PLUS loan (a parent loan) at 8.5%. Private education loans, which are not government-guaranteed, tend to be more expensive than the PLUS loan with higher fees and variable interest rates. But private education loans are less expensive than credit cards.
It pays to shop around. Many lenders offer loan discounts on the federal education loans, such as a 0.25% interest rate reduction forsigning up for EFT, where your monthly loan payments are direct debited from your bank account. Focus on the discounts that are immediate in nature (e.g., a rebate of the loan fees) or which can’t be lost (e.g., EFT discounts). Very few students qualify for the discounts that require them to make all their payments on-time.
Resist the temptation to increase the term of the loan. Although this reduces the size of the monthly payment by as much as 1/2, it substantially increases the total cost of the loan.
A good tip is to minimize your borrowing. Ask yourself if you really need to borrow that much money. Live like a student while you are in school, so you don’t need to live like a student after you graduate.
When evaluating private education loans, it is easy to get confused by the interest rates. The interest rates on private education loans are variable rates, pegged to an index rate like the LIBOR or Prime Lending Rate. Prime + 0% is about the same as LIBOR + 2.8%. It is better to have an interest rate pegged to the LIBOR index, as the LIBOR index is increasing more slowly than the Prime Lending Rate.
The FinAid.org site includes comprehensive information on student loans at www.finaid.org/loans/, including loan calculators, lists of all federal and private education lenders, and practical advice.
Finally, don’t overlook scholarships. Winning scholarships reduces the amount you need to borrow. I recommend searching for scholarships at FastWeb.com, the largest and most popular free scholarship search site.”
Thanks Mark! Your extensive student loan knowledge impresses us all.
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Those of you who want to learn more about Mark and student loans should check out finaid.org. Here’s some additional info on Mark that I found interesting:
‘”FinAid was created by Mark Kantrowitz, a noted financial aid and college planning author. He is Director of Advanced Projects for FastWeb, the largest and most popular free scholarship search. Previously, he was a Research Scientist at Just Research, the US software laboratory for Just system Corporation of Japan. Mark has earned the praise of numerous college administrators, journalists and students and families for his dedicated work on the FinAid site; also, not surprisingly, he managed to fund his own schooling without spending a single cent of his parents’ money. In his spare time, Mark folds origami models, repairs antique battery-operated toys, creates stained glass windows, and plays with his cats, Joto and Tweety. He enjoys sampling gourmet chocolate. Mark was diagnosed with a rare form of cancer a few weeks after the birth of his son, and is currently disease-free after undergoing chemotherapy, an orchiectomy and a cholecystectomy. Mark is also a survivor of a direct lightning strike on his home. “
Category: Money
Tags: student loans
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10 Responses to “Student Loans: A Primer”
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May 26th, 2006 @ 8:12 pm
Cancer AND his home was hit by a lightning bolt?! Man, what a life!
May 26th, 2006 @ 10:24 pm
Some good information from Mark. I am in college, taken out loans etc because my parents couldn’t help out that much so I know exactly how you feel.
Applying for the FAFSA is the most important thing to do first. You must do this. This allows you to be eligible for grants, loans, and work study. Basically when you fill this out it will look mainly at your parents income and assets, your income and assets, the number of people in your family and number in college. I believe, but not 100% sure, that your parents main residency and any IRA’s are not counted. From there you get your EFC, or expected family contribution. This is how much the government thinks you and your family are able to pay for college. This is compared to the cost of the school(tuition, books, living costs, etc) to see how much financial help you need, according to the gov’t.
The best loans to get are perkins loans, followed by stafford loans. Stafford loans can be subsidized(gov’t pays the interest while your in school) and unsubsidized. Obviously, they give out perkins and subsidized loans first to those with the most need. And if you need more, the ones mark listed are available as well. Those with the most financial needs can also get grants which are basically a free gift of money.
One more tip. If you or your parents have any significant debts and significant savings you might want, depending on your own family’s financial situation, to look at paying some of those debts off before you fill out the fafsa. The efc is determined by assets and not debts. Either way you should talk to someone at your high school or college’s financial aid office and fill at the fafsa as soon as possible as I think the fed gov only has a limited number of grants to give out.
Hope that can help out some more. I want to make out some very detailed posts on my own blog in the future about the process and how to maximize the your efc and the aid you can get. I know from first hand experience how difficult it is when your parents can’t help you out with college.
May 27th, 2006 @ 1:57 am
Also, many companies that offer stafford loans offer discounts once you’ve paid ontime on your loan(s) for 36/48 months. Citibank (www.citiassit.com) offers a 1% discount once you’ve paid ontime for 36 months.
May 28th, 2006 @ 4:33 pm
Thank you, thank you, thank you!! And give a couple of thanks to Mark as well.
You two provided me exactly what I was looking for by directing me in the right direction at getting the student loans that accomadates my personal situation. Also thanks to those that commented as well, you guys and gals provided insightful posts that further acknowledged what I need to do in order to not bury myself under the wrong loan.
THANKS AGAIN!!
June 7th, 2006 @ 2:50 pm
The other vital thing to do is hunt for scholarships like crazy. There are tons of free sources online for them, including my radio show.
Christopher S. Penn
Daily financial aid internet radio on demand
http://www.FinancialAidPodcast.com
Got iTunes? http://www.FinancialAidPodcast.com/subscribe/
Got loans? http://www.FinancialAidPodcast.com/consolidate/
November 4th, 2006 @ 4:00 pm
Hello,
I recently published an article on the dangers and benefits of student loans and other forms of college financial aid – here is a quote from it, in case you are interested:
Student loans repayment can be a real nightmare without adopting some strategies that would help the new graduates to organize their social and financial life. Here are some strategies they can use to do this:
- An additional part-time job;
- Freelancing is another option (meaning that they can do particular pieces of work for different organisations, without working all the time for a single organisation);
- They should try to keep their living expenses as low as possible (live in a smaller apartment, live with a roommate to share some of the expenses, find an apartment that is closer to the job, to eliminate the extra-expenses for transport etc.);
- To apply for forbearance (this is an immediate solution for hard times when the new graduate is in impossibility to re-pay the amount of money and the need for student loan consolidation becomes apparent; it is a temporary period, when the graduate can postpone or delay his or her re-payments until a later time on a federal or direct loan after the beginning of the re-payment, and when the student doesn’t qualify for deferral). The forbearance must be applied through the lenders of the loans.
- To consolidate the payments.
If you feel this help, please drop by my website for additional information, such as federal student loans information or additional resources on private student loans .
Regards,
Michael
May 16th, 2008 @ 8:57 am
A FEDERAL STAFFORD LOAN is a low interest rated program available for the graduate and undergraduate students. The Federal Stafford Loan does not consider how much a student or a parent can manage to pay. It is simply available for anyone who needs a financial aid and with low rates. It is much known to many colleges and universities simply because it is offering what the beneficiaries need.
July 12th, 2008 @ 9:29 am
To choose the best loans, focus on the loans with the lowest interest rates and fees. The cheapest loans is the Federal Perkins Loan, with a fixed rate of 5.0%. Next is the Federal Stafford Loan, at 6.8%, followed by the PLUS loan (a parent loan) at 8.5%. Private education loans, which are not government-guaranteed, tend to be more expensive than the PLUS loan with higher fees and variable interest rates. But private education loans are less expensive than credit cards.
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