Federal Student Loans in a Nutshell

By Susan M. Keenan

Student loans typically make up a large part of the way in which college educations are financed. Federal student loans make up a major percentage of the loans that students acquire. Not all colleges and universities participate in all of the federal government programs that are available. Therefore, if you are planning on taking advantage of the government programs for help with your tuition, it is important to check with the schools that you are considering to see which programs will be available at which schools.

Understanding the differences among loans is critical to getting the best deal. In the Federal Family Education Loan Program, a private lender is responsible for providing the funds. In the Federal Direct Loan Program, the federal government is directly responsible for providing the funds for the loans. The federal government offers two basic loans for college students: the Federal Stafford Loan and the Federal Perkins Loan.

Federal Stafford Loan

Undergraduate and graduate students who qualify can take out Federal Stafford Loans with low cost terms. The federal government provides the money that makes these low cost loans possible.

Although no payments are due while the student is in school on at least a half time basis, the loans will be repaid in full. After a predetermined grace period has passed after the student’s graduation from college, the repayment of the loan begins. Moreover, no prepayment penalty goes in effect should the student pay the loan in full before the due date.

In order to qualify for the Federal Stafford Loan, the student must attend an accredited college or university on at least a half-time basis, must be a United States citizen or permanent resident of the United States, and must complete a FAFSA or Free Application For Federal Student Aid.

Annual and lifetime limits exist on federal loans. Variations as to the limits are in place as well, depending on the student’s status with independent students receiving a larger loan limitation.

The loan limits for dependent students are as follows: freshman- $2,625,sophomore- $3,500, and junior or senior- $5,500.

The loan limits for independent students are as follows: freshman-$6,625, sophomore- $7,500, junior or senior- $10,500, and graduate- $18,500.

Lifetime loan limits are as follows: undergraduate dependent students- $23,000, undergraduate independent students- $46,000, and graduate students-$138,500.

Repayment terms are very flexible. All of the student’s eligible loans are added together to calculate a single monthly payment with a fixed interest rate.

The standard repayment plan requires that the interest and principal are repaid over a ten year period. A graduated repayment plan incorporates reduced initial payments that gradually increase over time. This plan requires the federal loan to be repaid within ten years as well.

An extended repayment plan involves repayment over the course of twenty-five years. This plan requires a qualification process in which the student must show that he or she has high levels of student debt. An income sensitive repayment plan, accessible by approved application only, permits students to repay their loans based on a percentage of their annual gross income.

Federal Perkins Loan

Federal Perkins Loans are sponsored by the U.S. Department of Education. Students who qualify can use one of these loans to pay for their college education, including graduate school. Each college or university determines which students show the most need and award the loans accordingly.

No payments are required while the student is in school with at least half time status. Moreover, no fees exist for this particular type of loan.

In order to qualify for the Federal Stafford Loan, the student must attend an accredited college or university on at least a half-time basis, and must be a United States citizen, permanent resident of the United States, or have eligible non-citizen status. Additionally, the student must have satisfied all Selective Service requirements, must complete a FAFSA or Free Application For Federal Student Aid, and must not have any defaults on Title IV educational loans.

As with the Federal Stafford Loan, a fixed annual limit is placed on the amount of money that a student may borrow. Undergraduates may borrow $4,000 each year and graduates may borrow $6,000 each year. Nine months after the student graduates, the repayment of the loan begins. If the student drops below half year status at any time, the repayment of the loan begins immediately.

© Doityourself.com 2006