In New Jersey this week, many college students will either be enrolling into college for the first time or be a returning student continuing their college studies. Unless these students have a full merit scholarship to attend school or be financially fortunate to have their parents pay for their education, some students will have to face the harsh reality of applying for student loans. If you are a student and have to obtain student loans it is important that you know the different student loan options that colleges have to offer. Student loans can either be disbursed to college students as either Federal or Private loans, and even within the federal and private student loan pool there are still important characteristics that must be understood.
The proper name for federal student loans are known as William D. Ford Direct Stafford Loans, the Direct Stafford loans are underwritten by the US Department of Education, which means the US Dept of Ed disburses the funds to the college or university once a student has been awarded with a loan. Students are awarded federal loans when they student fill out the FASFA (Free Application for Federal Student Aid) application. The FAFSA application will determine what funding sources are available to students; some examples of funds that could be awarded to pay for a student’s education could be grants, federal or private student loans and non-merit scholarships given by the school. Here are some characteristics and differences in federal and private student loans:
1. William D. Ford Direct Subsidized and Unsubsidized Student Loans - These loans are federal loans underwritten by the US Department of Education which means the federal government is the lender. Here are some differences between the two loans:
• Subsidized loans are based on a student’s financial and economic need which is determined when the student completes and submits the FAFSA form. No interest accrues on the loan during the time the student is in school, but the 6 month grace period has been eliminated, so that means interest accrues right after graduation.
• Unsubsidized loans funds are disbursed by the government, a student’s financial or economic need is not necessary to receive funds. The interest accrues on the loan when the funds are disbursed by US Dept of ED to the school to pay for the student’s college cost. What does that mean, if a student receives an unsubsidized student loan during all 4 years of college, interest will accrue from year 1 to year 4, and during repayment.
2. Federal Perkins Loan – is a federal loan but the school is lender, which means not all schools participate to provide this loan. When you have to repay the loan, payments are made either to the school or to the school loan servicer. The loan can cover tuition costs for undergraduate, graduate and professional students.
3. PLUS loan – is a federal loan where as the US Dept of Education is the lender. The loan borrower is the parent to pay on behalf of student’s undergraduate tuition, graduate and professional students can apply too. When borrowers apply the credit history of borrower must not be adversely challenged, the interest rate on this loan is fixed.
4. Private Loans- the funds are disbursed by either a bank, credit union, state agency or a school. Here are some points to know, if you are considering applying for a private student loan:
• Interest rate – Interest on private loans can be as high as 18% or the rate can be variable read the fine print or ask the loan funder.
• Repayment - Some private loan borrowers may want you to pay on the loan while you are still in school, and the interest is always paid by the borrower. The bank will not subsidize the loan interest while you are in school.
• Consolidation- Private loans cannot be consolidated into a Federal Direct loan Consolidation program
• Tax Deductible- the interest on the loan may not be tax deductible.