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Student Loan

They are loans offered to students to assist in payment of the costs of professional education. These loans usually carry lower interests than other loans, and are usually issued by the government.

Loans for Higher Education
While included in the term "financial aid" Higher Education Loans differ from scholarships and grants in that they must be paid back. They come in several varieties in the United States

• Federal Student Loans made to students directly: No payments until after graduation, but amounts are quite limited
• Federal Student Loans made to parents: Much higher limit, but payments start immediately
• Private Student Loans made to students or parents: Higher limits and no payments until after graduation.

FEDERAL LOANS TO STUDENTS
Federal student loans in the United States are authorized under Title IV of the Higher Education Act as amended.
The first type are loans made directly to the studetn. These loans are available to college and university students and are used to supplement personal and family resources, scholarships, grants and work-study. They may be subsidized by the U.S. Government, or may be unsubsidized depending on the student's financial need.

Both subsidized and unsubsidized loans are guaranteed by the U.S. Department of Education either directly or through guaranty agencies. Nearly all students are eligible to receive them (regardless of credit score or other financial issues). Both types offer a grace period of 6 months, which means that no payments are due until 6 months after graduation, or 3 months after the borower becomes a less-than-full-time student without graduating. Both types have a fairly modest annual limit regardless of the student's actual cost of education. The present limit in January 2006 is $2,800 per year.
Subsidized Federal student loans are offered to students with a demonstrated financial need: generally requiring a low family income. For these loans, the federal government makes interest payments while the student is in college. For example, those who borrow $10,000 during college will owe $10,000 upon graduation.

Unsubsidized federal student loans are also guaranteed by the U.S. Government, but the government does not pay interest for the student, rather the interest accrues during college. Those who borrow $10,000 during college will owe $10,000 PLUS INTEREST upon. The accrued interest will be "capitalized" into the loan amount, and the borrower will begin making payments on that accumulated total. For example, those who have borrowed $10,000 and had $2,000 accrue in interestwill owe $12,000. Interest will begin accruing on the $12,000. Students will also choose to pay the interest while college.

FEDERAL STUDENT LOANS TO PARENTS
Usually these are described as PLUS loans (Parent Loans for Ungraduate Students). Unlike loans made to students, parents are able to borrow much more - usually enough to cover any gap in the cost of education. However, there is no grace period whatsoever. Payments start immediately.

Parents should be aware that THEY are responsible for repayment on these loans, not the student. This is not a 'cosigner' loan with the student having equal accountability. The parents are on the hook to pay and if they do not do so, it is their credit that will suffer. Also, parents are advised to consider "year 4" payments, rather than "year 1" payments. What sounds like a "manageable" debt load of $200 a month in freshman year can mushroom to a much more daunting $800 a month by the time 4 years have been paid for through borrowing. The combination of immediate repayment and the ability to borrow substantial sums can be dangerous.

Parents should also be aware that current legislation will raise the interest rate on these loans significantly, to 8.5% as of July 1, 2006.

Private student loans
These are loans made to students by private finance companies: sometimes banks, sometimes specialized education lenders. Advocates of private student loans suggest that they combine the best elements of the different government loans into one: They generally offer higher loan limits then direct-to-student federal laons, ensuring the student is not left with a budget gap. But unlike to-the-parent government loans, they generally offer a grace period with no payments due until after graduation. This grace period ranges as high as 12 months after graduation, though most private lenders offer 6 months.

Rates and interest Private student loan rates are lower than non-specialized private loans (e.g. "signature" loans) but slightly higher than government loan rates. That may be changing, as pending legislation would raise government student loan rates to similar rates as private student loans.

Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the BBA LIBOR rate, plus an overhead charge. Because private loans are based on the credit or laon history of the applicant, the overhead charge will vary. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit. Beginning a few years ago, money paid toward interest is now tax deductible.

Fees Private loans often carry an origination fee. Origination fees are a one-time charge based on the amount of the loan, they can be taken out of the total loan amount, or added on top of the total loan amount, often at the borrower's preference. Some lenders offer low-interest, 0-fee loans; but these are usually available only to those with high credit scores of 800 or more. More commonly, loan origination fees are from 3-9%. While a 0 fee loan at Prime+3% interest might not sound bad, some contributors suggest that borrowers are better off paying a modest fee to get a lower interest rate, as is often done with mortgages. Each percentage on the front-end fee gets paid once, while each percentage point on the interest rate is calculated and paid throughout the life of the loan.

Eligibility Private student loan programs generally issue loans based on the credit history of the applicant and any applicable co-signer/co-endorser. This is in contrast to federal loan programs which deal primarily with need-based criteria, as defined by the EFC and the FAFSA. For many students, this is a great advantage to private loan programs, as their families may have too much income or too many assets to qualify for federal aid, but insufficient assets/income to pay for schooling without assistance.

Additionally, many international students studying in the United States can obtain private loans (they are ineligible for federal loans in many cases) with a co-signer that is a United States citizen/permanent resident.

Disbursement: How the Money gets to Student or School
There are two distribution channels for Federal student loans. The channels are identified by their names: Federal Direct Studnet Loans and Federal Family Education Loans. Federal Direct Student Loans, also known as Direct Loans, or FDLP loans are funded from public capital originating with the U.S. Treasury. FDLP loans are distributed through a channel that begins with the U.S. Treasury Department, and from there passes through the U.S. Department of Education, then to the college or university and then to the student. Federal Family Education Loan Program loans, also known as FFEL loans or FFELP loans, are funded with private capital provided by banking institutions (ie: banks, savings and loans, and credit unions). Because the FFELP loans use private capital as their source, students who use FFELP loans are able to take advantage of payment options that are similar to those available to customers who take out a home loan or a consumer loan. For example, some institutions will allow a discount for automatic payments, or a series of on-time payments. In 2005, approximately 2/3 of all federally subsidized student loans are FFELP.

The maximum amount that any student can borrow is adjusted from time-to-time as Federal policies change. A study published in the Winter, 1996 edition of the Journal of Student Financial Aid, titled “How Much Student Loan Debt is Too Much” suggested that debt for the average undergraduate should not exceed 8% of total income after graduation. Some financial aid advisors have referred to the 8% level as “the 8% rule.” Circumstances vary for individuals, so the 8% level is an indicator, not a rule set in stone.

For Private Loans it is far simpler. The lender generally disburses the money directly to the school. Any funds borrowed beyond tuition and fees is given to the student for living expenses, room, board, etc.

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This article is licensed under the GNU Free Documentation License.
It uses material from the Wikipedia article "Student Loan".

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