Student Loan Basics

There are two sources for student loans — the federal government and private lenders. In order to obtain most federal student loans, you will first need to file the Free Application for Federal Student Aid (FAFSA). In most cases, the FAFSA is required for all federal financial aid including federal student loans.

Editor’s Note: As of July 1, 2010 all federal student loans are provided by the US government.

There are four main federal student loan programs:

• Federal Stafford Loan
• Federal PLUS Loan
• Federal Graduate PLUS Loan
• Federal Consolidation Loan

The Federal Stafford loan is made in the name of the student and is based on need (only the subsidized portion), and does not require a credit check (it’s guaranteed by a private guarantor and backed by the government rather than credit/income/assets, etc.) and does not have to be repaid until after the student graduates, leaves school or stops attending on at least a half-time basis. Some schools offer Stafford loans directly through the federal government. These are commonly known as Direct Stafford Loans. The schools that offer Direct Loans are known as Direct Lending Schools. Other schools offer Stafford loans through banks or other lenders. These schools are commonly called FFEL schools (Federal Family Education Loan). In order to obtain a federal Stafford loan through a FFEL school, you will need to choose a lender.

Federal PLUS student loans are made in the name of a parent. While they do require a credit check, the credit criteria to obtain a PLUS are not as stringent as they are for other types of consumer loans. Repayment of a PLUS loan begins after the loan is fully disbursed. Again, some schools offer PLUS through the federal government and others offer it through banks or other lenders.

The Federal Graduate PLUS is just like the PLUS for parents except that it is made in the name of a graduate student. However, you must first use your Federal Stafford loan eligibility before applying for a Federal Graduate PLUS loan. It is important to remember that the Federal Graduate PLUS requires payment as soon as the loan is fully disbursed. Deferment options are available while you are still attending school at least half-time. Check with your financial aid office. Servicers are automatically placing Grad PLUS loans in deferment.

Federal loan consolidation is for students who are in repayment status or parents who wish to extend the repayment period on their current PLUS and obtain a fixed interest rate for the life of the loan. You can combine all of your eligible federal student loans into one loan with a Federal Consolidation Loan. Consolidating student loans also usually locks the interest rate you pay on your loan.

Editor’s Note: As of July 1, 2010 all federal student loans are provided by the US government.

If federal loans are not enough to cover your educational expenses, if you do not wish to make payments of principal and interest while in school or if you want a loan that is in the student’s name, there are private student loans (sometimes called alternative student loans). Private student loans are made by banks and other lenders. They must be used solely for education expenses, but offer convenience and flexibility not found in other federal loan programs. However, you will need good credit and most students will need a qualified co-signer in order to obtain a private student loan. Also, while interest rates, fees and other loan program terms are competitive, they vary widely from lender to lender. It is important to compare your options before choosing a private loan. Do some research on the internet; this is a great place to start comparing private student loans. Once you have found a loan that meets your needs, you can apply online and in many cases get an instant decision on approval.

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