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Student Loan Basics
By LeeAnn Bernier-Clarke MEd, NCC, NCCC
Most families struggle to accumulate the financial resources for their children's post-secondary education. With the escalating cost of higher education, many parents will have to turn to some form of financial support.
Student loans provide an affordable option. This article will introduce some basic information on college student loan options in the U.S. and provide some Internet resources where you can learn more.
Types of Loans Available
Education loans fall into two main categories. Need-based loans are designed to help meet part of the total educational costs determined to be the family's responsibility by the federal government and school to which the student is applying when a financial need exists. Non-need based loans are designed to help pay part of the family contribution when the family doesn't have the cash on hand.
The Federal Stafford Loan (available for graduate and undergraduate school) is a simple-interest, government-guaranteed, no-collateral loan. The interest rate is fixed annually, with a lower rate of accumulation while the student is still in school. An interest cap is established at the time the loan is taken out that cannot increase in subsequent years. Students may borrow while in school and begin repayment six months after leaving school or graduating. The amount of funding available is fixed for each year in school. Independent students qualify for a significantly higher annual amount than dependent students do.
The Federal PLUS (Parent Loan for Undergraduate Students) is also a non-need based, simple-interest, government-guaranteed, no-collateral loan with fixed interest rate and established cap that are slighter higher than the Stafford Loan. Advantages of the PLUS Loan are that parents may be eligible to borrow up to the total cost of college less all financial aid received, and they are eligible if they meet the minimum government credit requirements. The PLUS is based on a 10-year repayment plan with no prepayment penalties, so parents can begin making the low monthly payments while the student is still in school.
Alternative loans can fill the gap between what you receive from all financial aid sources and what you really need to cover the cost of your child's education. Many financial institutions offer student loans with no loan fees, low interest rates, no payments due while the student is in school, flexible repayment options afterwards, and borrower benefits. Some parents borrow against their home mortgage or retirement accounts to cover college expenses.
For information on current loan rates, visit the Student Loans page of the Student Market website.
The first step in applying for a student loan in the U.S. is to fill out a Free Application for Federal Student Aid (FAFSA) form. These are available on the U.S. Department of Education's FAFSA website, where you can fill it out and apply online.
They will send your completed form to all of the colleges that you indicate you plan to apply at. This should be done when you complete your income tax forms, as close to Jan. 1 as possible during your teen's senior year in high school.
Print copies can also be obtained through any college financial aid office or sometimes from your teen's high school guidance counselor.
If you want to apply for early admission in the fall of senior year, most colleges allow you to process the FAFSA or their own form with estimated income information so that a preliminary financial aid package can be developed.
The FAFSA is used by the college financial aid office to determine need-based financial aid and develop a financial aid package that is included with the college acceptance letter. When it is received, the family knows how much of the total educational expense will be covered by scholarships, grants or college work-study income, how much they will be responsible for, and how much student loan funding they qualify for.
With this information, they can decide whether to accept the offer and proceed with the application and admission process.
Student Loan Considerations
How much student loan assistance a family should take on is a very personal family decision. Some parents believe that taking out student loans, which the student is obligated to pay back upon graduation, provides a personal investment that will increase dedication and responsibility toward their education.
Consider the employment and income prospects of the individual student. A student majoring in computer engineering may be in a much better position to pay off substantial student loans than one majoring in art or philosophy.
An average monthly student loan payment is generally the equivalent of a car or monthly rental payment on a modest apartment. That can really cut into the budget of a young family or an individual just starting out in a career.
Some professionals, such as teachers and doctors, may defer, reduce or even cancel all or part of their loan payment by practicing in under-served areas for a certain amount of time.
Begin planning early by attending high school, local college or government-sponsored financial aid workshops and forums by your teen's junior year of high school. Approach planning your child's financial package as an informed consumer, researching all other options such as scholarships and grants.
Consult with your teen's guidance counselor to find out about any competitions, and high school affiliated organization sponsored scholarships for which your child may qualify. The Internet also provides a wealth of resources to help in this process.
Encourage your teen to apply to the colleges of their choice early in the senior year. Get to know a financial aid officer at the schools to which they are applying during the admissions process. If your teen's GPA or College Board scores are high or they have achieved recognition for other accomplishments, there will never be a better time to negotiate financial aid options than during the application process.
Colleges are very competitive in recruiting exceptional students and financial aid officers can become advocates, providing information and access to site-based resources. It is wise to exhaust all other financial aid options before taking out a student loan.
It is important to involve your teens in discussions about financing their higher education early in their high school experience. Make it clear what their responsibilities are. Stress the importance of grades, test scores and relevant extracurricular activities.
Discuss what family funds will be available to them and what they will need to help out with through scholarships or savings. Explain how student loans work and what their personal repayment obligation will be.
Teens should be actively involved in every phase of college selection, application and obtaining financial aid. This is the first crucial adult decision-making and action planning process that most teens will face. Parents need to act as resources and guides throughout the process, but remember it is the student who will ultimately live with the results.