Student Loan Debt Consolidation

United States



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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, although interest will start to accrue immediately.



FEDERAL LOANS TO STUDENTS



See Perkins Loan, Stafford loan, Federal Family Education Loans, Ford Direct Student Loans and College Consolidation Loan



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 student. 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 guarantee 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 borrower 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 $2,625 per year for freshman undergraduate students, $3,500 for sophomore undergraduates and $5,500 per year for junior and senior undergraduate students.



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. or example, those who have borrowed $10,000 and had $2,000 accrue in interest will owe $12,000. Interest will begin accruing on the $12,000. Those who borrow $10,000 during college will owe $10,000 PLUS INTEREST upon graduation. The accrued interest will be "capitalized" into the loan amount, and the borrower will begin making payments on the accumulated total. Students can also choose to pay the interest while still in college.



Federal student loans for students of medicine have higher limits, $8,500 for subsidized Stafford and $30,000 maximum for unsubsidized Stafford. Many students also take advantage of the unsubsidized Perkins loan. For medical students the limit for Perkins is $6,000.



FEDERAL STUDENT LOANS TO PARENTS



See PLUS loan



Usually these are described as PLUS loans (Parent Loans for Undergraduate 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.



Under new legislation graduate students are now eligible to receive PLUS loans in their own names for studies. These loans have the same interest rates and terms and Parent PLUS loans.



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.



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Private student loans



These are loans which are not guaranteed by any governmental agency, and are made to students by banks or finance companies. 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 than direct-to-student federal loans, 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 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. It is a fact that 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. Some have suggested that this makes the interest rate more critical than the origination fee.



In fact, there is any easy solution to the fee-vs-rate question: ALL lenders are legally required to provide you a statement of the "APR - Annual Percentage Rate" for the loan before you sign a promissory note and commit to it. Unlike the "base" rate, this rate DOES include any fees charged and can be thought of as the "effective" interest rate including actual interest, fees, etc. When comparing loans, it may be easier to compare APR rather than "rate" to ensure an apples-to-apples comparison. APR is the best yardstick to compare loans which have the same repayment term; however, if the repayment terms are different, APR becomes a less-perfect comparison tool. With different term loans, consumers often look to 'total financing costs' to understand their financing options.



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.



The terms for alternative loans vary from lender to lender, and a common suggestion is to shop around on ALL terms, not just respond to "rates as low as..." tactics that are sometimes little more than bait-and-switch. Examples of other borrower terms and benefits that vary by lender are: Deferrments (amount of time after leaving school before payments start) and forebearences (a period of time where payments are temporarily stopped due to financial or other hardship). These policies are solely based on the contract between lender and borrower and not set by Department of Education policies.



Federally subsidized consolidations are not available for alternative student loans, though several lenders offer private consolidation programs. Borrowers of privately subsidized student loans may face the same restrictions to bankruptcy discharge as for government based loans: new legislation makes clear that these loans are, like federal student loans, not dischargeable under bankruptcy. However, even before the legislation was passed, private student loans that were guaranteed 'in whole or in part' by a non-profit entity are non-dischargeable in bankruptcy (and most private loans, regardless of the lender, were indeed guaranteed by a non-profit).

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