Federal Student Loans

FEDERAL STUDENT LOANS The time comes when a student entering college for his higher studies has to organize the necessary funds to finance his education over a long period of time in order to realize his dreams for a bright future. In this context, of course the first option is to seek and apply for a Grant or a Scholarship in which case there is nothing to worry, since these are nonrepayable outright gifts from the government / sponsors from private businesses. However these opportunities are very limited for obvious reasons and hence may seem hard to obtain. (Note: We have posted separate articles on the topics of Grants and Scholarships respectively which you may refer for details on these two topics)). Presuming that you have explored all possible avenues available to secure an outright grant or a scholarship and failed, the next option available is a very complex process of trying to choose the type of loan that best suits your purposes from a growing number and variety of options available. At this point you will now fall back on doing some research on Student Loans, which can be broadly categorized into 2 main groups, namely (1) Federal Student Loans and (2) Private Student Loans. Since Private Student Loans (as their name implies) are more costly to service than the former, you will no doubt give first preference to get all the possible information on all types of Federal Student Loans; with which we will be concerned from this point onwards in this write-up, since we have covered Private Student Loans in a separate article. General Characteristics of Federal Student Loans Federal Student Loans are underwritten by the U.S. Government and invariably carry more favorable interest rates. The implementation of making these loans available to students is executed via the Federal Family Education Loan Program (FFELP) acting directly through schools, banks and other student loan lending organizations. What makes these loans click and further attractive to the prospective student borrowers are their in-built characteristics of longer periods with multiple options available for repayment, and more friendly overall credit terms compared to Private Student Loans. The Federal Loans can be further classified broadly under (a) Loans based on the actual need of the student and (b) Loans targeting the parents of the students (dependent children only) seeking College education. (i)

General Eligibility and Application for a Federal Loan Any College Student are eligible to apply by filling and submitting a form named Free Application for Federal Student Aid (FAFSA) provided you satisfy the US Citizenship requirements (Footnote 1). This requirement applies to all loans types discussed below. (You may get further assistance for filling the FAFSA form from the website www.FAFSAonline.com) It is important to note that you need not be enrolled to apply for student loans. You can apply any time after January 01st. However, you must be enrolled in the University to receive the loan. (any applications submitted prior to January 1 will be rejected as they cannot be processed due to certain reasons of taxation). Only you are solely responsible for application, receipt and repayment of all federal loans except PLUS loans, and there is no necessity to get your parents to even cosign your application even if you are under 18 years of age as “defense of infancy” does not apply to student loans.

“US Citizenship requirements” - All

eligible non-citizens.

US citizens / US nationals, US permanent residents and

Types of Federal Loans 1. Perkins Loans To be eligible, you have to establish the need for “exceptional” financial aid and fill an FAFSA form. It carries the lowest fixed interest rate of 5% out of all student loans, and is subsidized (paid) by the government while in school enrolled at least half time in a degree program. Generally, the school will determine the students with the greatest need. Re-payments do not begin until after 9 months from leaving school. Borrowing is possible up to $ 4,000 for undergraduates and up to $ 6,000 for graduates depending on their level of need, though it may not exceed $ 2000 in any one year. The funds are disbursed through the school itself which will pay you direct (mostly by check). In the alternative, you may apply your loan to the school charges. You will receive the loan in at least two installments during the academic year. In disbursing the loans to the qualifying students, the school may combine some of its own funds too with the federal funds. Another notable difference from Stafford Loans is that Perkins Loans carry no fees and give a longer grace period. The student gets a maximum period of 10 years to repay the loan apart from any deferment or forbearance periods that may be allowed (which will be automatically added and the period extended). A distinct drawback however, compared to Stafford Loans, is that funds available for disbursement under this program are now very limited due to cut backs by the Congress. Hence a Perkins Loan are likely to be granted to those who submit their applications earliest and to those who show the greatest need for financial aid. You may contact the Administrator of your College Financial Aid for more details. 2. Stafford Loans The Stafford Loan is by far the most common and popular federal loan as anyone can apply and there is no need to demonstrate financial need for Stafford unsubsidized loans as distinct from Stafford Subsidized loans. Other requirements for eligibility apart from US citizenship requirements (Footnote 1) are – must be enrolled or plan to enroll at least half time, must be either accepted for enrollment or attend a school participating in the Federal Family Education Loan Program (FFELP), Should not be in default on any education loan taken earlier or owing a refund on any grant received earlier. Undergraduate whose parents had been refused a PLUS loan automatically qualify for higher limits under Unsubsidized Stafford Loans. The interest rate on these loans is currently fixed at 6.8% and is categorized in to (a) subsidized loans with a grace period of 6 months before repayments start and an option to defer repayments until graduation, and (b) unsubsidized loans. The government pays the interest on the subsidized loans (i) during the period of the student’s schooling, (ii) during a grace period of six months immediately preceding repayment and (iii) during a period of duly authorized deferment of payments; while the student bears the cost of accrued interest on deferments in the case of unsubsidized loans. Unsubsidized loans are not need based, but the responsibility for all the interest accruing on an unsubsidized loan including the period at school lies on the student

Students who opt for borrowing from some lenders including Sally Mae Lenders enjoy options for saving money on repayments and life of loan servicing and option for managing your account online at www.ManageYourLoans.com, Other notable features are – flexible repayment options including consolidation, no repayments required while in school at least on half time, no pre-payment penalty, no credit score required, availability of a six month grace period for (i) when dropping to a status of less than half time and (ii) when no payments need be made during the period immediately following graduation. Borrowing limits have been increased effective July 1st 2006 as follows:Undergraduate Students – maximum loan limit (for 1st years) increased from $ 2,625 to $ 3,500 and (for 2nd years) from $ 3,500 to $ 4,500. Graduate and Professional Students – unsubsidized loan limit increased from $ 10,000 to $ 12,000. 3. PLUS Loans (Parent Loan for Undergraduate Students) Parent Plus Loan is a federally sponsored low interest-bearing loan (although much higher than Perkins or Stafford Loans) currently fixed at 8.5%. It is disbursed to parents of undergraduate dependent children enrolled at least half time. (Parents of independent children are not eligible to apply). Eligibility to apply is available to all US citizens / US nationals, US permanent residents and eligible non-citizens irrespective of financial status / assets owned or a necessity to show financial need (unlike in the case of Perkins and Subsidized Stafford Loans). No collateral is required but this is the only federal loan where a credit check is required although a full-scale credit check will not be resorted to. However, parent applicants should not have had any adverse credit experiences (Footnote 2) of default or bankruptcy. (Undergraduates whose parents fail to obtain a PLUS loan will qualify for higher limits under Unsubsidized Stafford Loans) Loan Limit: Parents can fund the entire cost of a dependent child undergraduate’s entire education cost related expenses through a Plus Loan, subject to deduction there from any other financial aid received in this connection. Features: • Flexible repayment terms with a grace period of 9 months before repayments start, and including options for deferment of repayments up to 60 months inclusive of the period your dependent child is in school. • Interest may be tax deductible.

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“Adverse Credit Experience”

An adverse credit history is defined as being over 90 days late on any debt repayment or having any Title IV debt (including a debt created due to a grant overpayment) within the last five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off. Note: It does not otherwise involve your credit score.

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Depending on your chosen lender, you stand to gain cost reductions and many other benefits such as money savings in repayments through various mechanisms such as timely payments, “auto-debit” standing instructions, managing your account online, life-of loan servicing, online application and approval process with instant credit decisions etc. This feature in fact, is applicable to all types of student loans. Make sure that you get the best possible deal from your lender /agent.

Fees: • Federal Government charges a 3% origination fee plus a federal default fee of up to another 1%. However, some lenders / agencies bear part of this cost and you are asked to pay only the balance. Repayment Schemes: • •

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Standard repayment: Monthly principal and interest payments up to 10-years. This plan has the lowest total interest cost. Graduated repayment: Start from Reduced monthly payments and gradually increase over the 10-year period for e.g. at 2 yearly intervals. You will be paying more than with standard repayment. However, this scheme is suited to those who start with a low income and expect a steady rise in their incomes with the passage of time. Income-sensitive repayment: You must reapply giving all your income details every year, as payments under this plan are adjusted annually to reflect changes in income. This is a rather complicated process, and you incur a higher total loan cost than under the standard repayment plan. Extended repayment: You may qualify for a 25-year repayment term if you have a high student loan debt, and you can also have the choice of making them in accordance with standard or graduated payment terms to keep the level of monthly payments affordable. Here too, the total loan cost is obviously much higher than with normal standard repayment. Student Loan Consolidation: You can combine your eligible loans into a new bulk loan with a single monthly payment at a fixed interest rate. While consolidation substantially lowers your monthly payments, it will increase your total loan cost in virtue of accruing interest over a longer repayment period.