Loans

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Before you borrow money from any source, do the research necessary to ensure that you understand the terms of any loan you are considering — the true costs, the repayment schedule, the grace period, the possibilities for deferring repayment and other related information. The terms you accept can affect your life, your borrowing power and possibly your credit for many years.

Many parents and students turn to federally-sponsored loans because terms are generally more favorable than those offered by private lenders. Each school adopts one of two federal loan programs — either the Federal Family Education Loan Program (FFELP) or the Federal Direct Student Loan Program (FDSLP). Both are governed by federal regulations that determine the loan program, loan limits, and repayment options. In the FFELP, private lenders provide the loan funds and work with guarantors to back the loans. In the Direct Loan Program, the government provides the loan funds directly to schools and backs the loans. Stafford Loans and PLUS Loans are offered by both programs.

Federal Stafford Loans
Students may borrow funds with Stafford loans, which may be subsidized — the government pays interest while the student is in school — or unsubsidized — the student pays all the loan interest, although payments may be deferred until graduation by capitalizing the interest. A student must demonstrate financial need to qualify for a subsidized Stafford Loan, but any student, regardless of need, is eligible for an unsubsidized loan. Many combine subsidized and unsubsidized loans for the maximum amount allowed each year. Although students borrow while they attend school, they are not required to begin repayment until 6 months after leaving school or graduating. The normal repayment term is 10 years for Stafford Loans, but students may be able to extend repaying by deferring or consolidating their loans.

Maximum loan amounts vary depending on undergraduate or graduate status and on how many years of academic study the student has completed. In general, a graduate student qualifies for a larger loan than an undergraduate student, and the more academic years a student has completed, the larger the maximum loan can be.

Loan rates on Stafford Loans are variable and are computed on the 91-day T-bill rate plus 1.7 percent during school with an additional 0.6 percent increase when the student graduates. But the rate is capped at 8.25 percent and may be less, depending on annual adjustments.

Every lender offers the same loan rate for the Stafford Loan, although some give discounts for on-time and electronic payment of the loan after graduation. They may also charge a guarantee fee of as much as 1 percent of the loan amount and a loan origination fee of as much as 3 percent of the loan amount; if the fees are charged, they are deducted from the loan proceeds before funds are sent to the school.

Federal PLUS Loans
The Federal Parent Loan for Undergraduate Students (PLUS) allows parents of dependent undergraduate students to borrow federally guaranteed, low-interest loans to pay for their child’s education costs, including tuition, room and board, supplies, lab expenses and transportation less any financial aid received. PLUS Loans are available through both the FFEL and Direct Loan programs, and most benefits are identical within the two programs.

Loan applicants are not required to demonstrate need but must meet credit requirements. No collateral is required.

Loan rates are variable, adjusted annually by the Department of Education, and are capped at 9 percent. Repayment generally begins within 60 days after the loan is fully disbursed.

Federal Perkins Loans
Undergraduate and graduate students who demonstrate exceptional financial need may be eligible for a low-interest — 5 percent — Federal Perkins Loan. The student's school acts as lender with funds contributed by both the federal government and the school. Loan repayment is made to the school.

Depending on when the student applies, her level of need and the school's available funds, she may borrow as much as $4,000 for each year of undergraduate study, or a total of $20,000. A graduate student may borrow as much as $6,000 for each year of study, or a total of $40,000, including any Federal Perkins Loans made as an undergraduate student. Loans generally must be repaid within 10 years.

Federal Consolidation Loans
For students with multiple federal loans, consolidation can make loan repayment easier to manage. A consolidation program for student loans made through the FFEL Program and the Direct Loan Program pays a borrower's various federal loans and creates a new consolidation loan. The consolidation simplifies loan repayment by combining loans that may have different terms and repayment schedules or may have been made by different lenders into one new loan.

The borrower reaps several benefits including an interest rate on the consolidated loan that may be lower than on one or more of the underlying loans; the rate is computed as the weighted average of all loans being consolidated rounded up to the nearest 1/8th percent and capped at 8.25 percent. In addition, the monthly payment amount on a consolidation loan may be lower and the amount of time to repay may be extended beyond what was available in individual loan programs.

If federal loan programs do not completely meet your needs, you may want to consider other options provided by private and commercial lenders.

The Education Resources Institute (TERI) Private Student Loan
TERI, founded in 1985, is a private, nonprofit organization that provides education financing and information services to college students and their families. The organization offers loan programs specifically designed for undergraduate students, graduate students, degreed undergraduate students and health professions students. Loans are administered nationwide and guaranteed by TERI, and funds are available through participating lenders.

Specific interest rates vary among lenders, and other terms may differ slightly between programs. In general, undergraduate students may borrow as little as $1,000 or as much as the full cost of their education less any financial aid received. Graduate students may borrow as much as the full cost of their education with a $45,000 annual cap. Contact TERI at www.teri.org or 1-800-255-TERI.

Nellie Mae Loans
Nellie Mae, a wholly owned subsidiary of SLM Corporation (Sallie Mae), provides a broad range of federal loans under the FFEL Program — Stafford, PLUS and Federal Consolidation Loans — and a group of privately funded loans — EXCEL Loans for parents and students, Grad EXCEL, Law EXCEL, MD EXCEL and MBA EXCEL. Private loans are offered with a choice of rates and other terms. Contact Nellie Mae at 1-800-634-9308.

Loans Using Assets As Collateral
Many would-be borrowers need to look no further than their own assets for a loan opportunity. Home equity, retirement savings and life insurance are among assets that can be tapped for college funding. However, financial planning professionals caution that borrowing against these assets may not always be in your own best interest. In fact, you should carefully weigh the real costs — and dangers — of using assets as collateral for a loan and consult a financial planning professional before you act.

A home equity loan can put your home at risk if you are unable to make payments. A loan against your retirement savings may jeopardize your own future by reducing the earnings on your investment. And if you cannot repay the loan, you face tax consequences. And an unpaid loan against the cash value of a life insurance policy can reduce death benefits; term life insurance offers no opportunity for borrowing.