North County Credit Union

The I.O.U. Degree: FAQs About Student Loans

by Kristin Baird Rattini



The I.O.U. Degree: FAQs About Student Loans

Useful resources
Financial aid shouldn't be a guessing game. Yet a recent study titled "Big Loans, Bigger Problems" conducted by the United States Public Interest Research Group (US-PIRG) found that most students take out student loans without a clear understanding of their cost. In fact, 78% of college students surveyed underestimated the total cost of their loans by more than $4,800.

College freshmen need not go into the first major financial commitment of their lives with blinders on. By diligently researching their student loan options and obligations, students can ace one of the most important exams of their college years: the challenge of managing their student loans responsibly.

Here are some frequently asked questions to help students familiarize themselves with their student loan options and responsibilities.


How do I apply for student loans?
To determine eligibility for most types of financial aid, including federal loans, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA). The form requires information about the family's income, assets, and taxes paid. The government then crunches the numbers to determine what the family can afford to contribute toward education expenses.

Talk to a credit union loan officer about student loan options.

The FAFSA should be filled out as soon as possible after Jan. 1 of the student's senior year of high school. "Some schools have very early priority dates in February and March for determining financial aid, so parents need to plan in advance and prepare their tax forms early," says Edward Schroeder, director of financial aid at the University of Arkansas-Fayetteville. "You'll need to know, 'What is your adjusted gross income? What is your tax liability? What's your number of exemptions?' If you put off filing taxes for too long, it could jeopardize getting financial aid."

Some private colleges may require additional forms; contact the school's financial aid office for information.


What are the most common federal student loans?
The Perkins loan and subsidized Stafford loan are need-based loans. They're offered only to students whose college costs will greatly exceed their ability to pay. The government pays all the interest on the loan—or subsidizes the loan—while the student attends school at least part time.

Student loans have their own fine print to consider and compare.
The unsubsidized Stafford loan is available to almost all students. Since it is unsubsidized, interest starts accruing as soon as the funds are paid out.

The federal PLUS loan, offered to parents with dependent students, is a credit-based loan. To qualify, parents can't have any negative marks on their credit record, such as a bankruptcy or history of slow payments.

For each type of loan, the dollar amount available and interest rates will depend on the student's year in school and whether he or she is considered dependent or independent by the Internal Revenue Service. Click here for the details.


The interest rate on my federal loans will be the same from every lender; why should I shop around?
"The interest rates are set by the government every July 1, but lenders offer different payment incentives that can knock hundreds or thousands off what the students have to repay," says Kal Chany, president of Campus Consultants in New York and author of "Paying For College Without Going Broke" (ISBN 0375762116). "Some lenders offer a quarter-percent deduction off your interest rate if you make electronic payments. Some reduce your interest rate if you pay on time for a certain number of months. Some lenders will forgive origination fees for on-time payments. There are a host of incentives, so it pays to shop around for lenders."

Private, or alternative, loans are available from a number of sources.
If a college participates in the direct-lending program, its students won't have a choice of lenders. They will borrow directly from the government, through the school.

However, two-thirds of schools participate in the Federal Family Education Loan (FFEL) Program, which simply means that students can take out their loans through any authorized lender. So check out your credit union and other lenders for the best deal.


The federal loans didn't cover all of my expenses; where should I look for additional loans?
Private, or alternative, loans are available from a number of sources, including your credit union. Your school can help you find a lender that makes alternative loans.

Lenders offer payment incentives that can knock hundreds off what the students have to repay.
As for parents, "There are options out there," says Mike Darne, director of business development for Sallie Mae. "They can use savings. They can take out a home equity loan or line of credit, which usually is tax deductible." A few lenders also now offer an educational line of credit. Like a home equity loan, the line of credit establishes a maximum that you can borrow—say, $20,000—and allows you to draw on it as needed, withdrawing money incrementally and paying it back with interest.

Students should be diligent in their search for loan sources. Jason Sutton, a senior at Texas Christian University in Fort Worth, Texas, learned about a private loan source through a posting in the employee break room at his part-time job at JC Penney. "There are other loans out there," he says. "You just really have to go seek them out."


What questions should I ask as I compare lenders?
Like car loans or credit cards, private student loans have their own fine print to consider and compare. In "Paying For College Without Going Broke," Chany offers this check list of items to compare:


When will I have to repay my loans?
"Some students are surprised they do have to repay," Schroeder says. "They've never had experience with loans before."

Students and their parents must fill out the FAFSA form to apply for financial aid.
On federal loans (Stafford, Perkins) that students take out, repayment begins either six or nine months after you graduate, withdraw, or attend school less than part-time. On the PLUS loan, parents must begin repayment within 60 days of final disbursement. Private loans may require payment on the interest while in school; check with the lender for terms.

You'll likely have several repayment plans to choose from. Eighty percent of borrowers choose the standard 10-year, equal-installment repayment plan. "You don't want to extend the life of the loan if you can avoid it," Chany says. "The standard repayment option is your quickest and cheapest way to pay off your student loans."

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Published December 3, 2001



NCUA Equal Housing Lender
Printed Wednesday, January 7, 2009

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