A quick review of federal loans:
-you will need to fill out a FAFSA
-Two federal loan programs.
1. The first is the Federal Family Education Loan Program (FFEL) which was created by the Higher Education Act of 1965. A bank or Sallie Mae is the usual lender. The lender is insured by a guaranty agency, which is usually a state agency . In New Jersey, the NJ Higher Education Student Assistance Authority acts as a guaranty agency for FFEL loans. If a borrower defaults on a FFEL loan, the lender is paid by and transfers the loan to the guaranty agency. The guaranty agency attempts to collect the loan. If the guaranty agency does not collect, it is paid by and transfers the loan to the US Department of Education (ED). The FFEL program was discontinued as of July, 2010. Note, however, that there are still many FFEL loans outstanding.
2. The second program is the William D. Ford Federal Direct Loan Program (commonly known as the Direct Loan Program) which was created by the Student Loan Reform Act of 1993. With Direct Loans, the lender is ED. If you received a federal loan after June 30, 2010, it is a Direct Loan.
-Types of loans: Stafford, Perkins, Parent Plus, Graduate Plus
1. Stafford
For undergraduate students, Stafford loans are either subsidized or unsubsidized. With a subsidized loan, no interest accrues until six months after graduation or six months after you leave school. A subsidized loan is based on need. With an unsubsidized loan, interest begins to accrue once the funds are disbursed. With either type of loan, payments are deferred until six months after graduation or six months after you leave school. With unsubsidized loans, the accrued interest is capitalized into the principal, so you are paying interest on interest. Therefore, it is wise to pay down the interest portion of the unsubsidized Stafford loan each year while you are in school. For graduate students, the unsubsidized loan program has ended; therefore, all new Stafford loans are unsubsidized.
The maximum amount of Stafford loans for dependent undergraduates is $31,000 (with maximum of $23,000 subsidized); for independent undergraduates, $57,500 (with maximum of $23,000 subsidized). For graduate students, the maximum amount of Stafford loans is $138,000; for medical students, $224,000.
2. Perkins
Perkins loans are based on exceptional need. The limit per year for undergraduate students is $5,000 with a cumulative limit of $27,500; for graduate students the yearly limit is $8,000 with a $60,000 cumulative limit which applies to both undergrad and graduate loans. The interest on Perkins loans is subsidized and the deferment period is 9 months after graduation or 9 months after leaving school.
3. Parent Plus
In this case, it is the parent or step parent of a dependent student who borrows the money. The parent and student must not be in default of any federal student loan. The parent must pass a credit check. Moreover, the parent or step parent must be a US citizen or an eligible non-citizen. The annual loan limit is the cost of attendance less any other financial assistance received. Beginning on or after October 1, 2016, a 4.276% origination fee is withheld by ED at the time of the disbursement and the remainder is disbursed into the student’s account. Interest accrues upon disbursement and payments begin 60 days after disbursement (unless the parent specifically requests and receives a deferment).
4. Grad Plus
The graduate student must be enrolled at least half time in a degree granting program. The student must pass a credit check The annual loan limit is the cost of attendance less any other financial assistance received. Beginning July 1, 2013, the interest rates on Grad Plus loans is variable with a maximum of 10.5% (ouch). Interest accrues from date of disbursement. Payments begin six months after graduation or six months after you leave school, and the accrued interest capitalizes into the loan so you are paying interest on interest. The origination fee is 4.276% and the balance is disbursed to the student’s account.