Borrowing For That Diploma – What Do I Need to Know?
Student lending remains one of the hottest topics today. This is being driven by two equally important factors. One is the large annual increases in tuition that occur each year at both public and private universities. The other is that people tend to go back to school in increasingly large numbers during times of economic downturn. Additionally, the current administration has made student lending a priority for reform.
There are two types of student loans that those going to college and university need to be aware of:
- Federal Student Loans – These are by far the best option for anyone looking to go college. Because they are backed by the government, eligibility is not determined by credit but by a form you fill out known as the FAFSA. Rates on the most common type of federal loan, known as the Stafford, are currently at 6.8% fixed. The problem is that the government will limit the total amount of what you can borrow, and this is often not enough to cover the full cost of school. The Obama administration recently raised the total loan limits for this program, but it still will fall short for many students. Deferment of payment and interest is usually available while in school. The federal loans are available as FFEL loans, or from the Direct loan program. Both programs have very similar terms and interest rates. Check out Finaid for details.
- Private Student Loans- At one time, Federal student loans would cover the full cost of schooling for most people who needed them. However, with the explosion of tuition costs, private loans have grown to $23 bn per year market. Because these loans are lent by private banks, credit history, income and job history as well as having a cosigner are extremely important. Rates can range anywhere from 4% to 21% depending on the credit profile and academic attributes of the student and cosigner. Most of these types of loans have variable interest rates that change over time and are tied to and index such as Prime of LIBOR. Be aware that origination fees on these loans also may be charged ranging from 0% to 5% of the loan amount of more. Private student loans are available from a wide variety of lenders, though availability is much more limited than it used to be. Usually, but not always, payment can be deferred until after school.
It is important to exhaust all your options for federal loans and fill out the FAFSA form. You can also get this form from your school’s financial aid office. Once you complete this, you will receive notice of your eligibility for federal loans. You then will know how much you need to borrow from other sources, including private student loans.
Neal Coxworth is an entrepreneur and a 17 year veteran of the consumer credit industry with experience in originating, underwriting and processing mortgage, student and consumer credit loans. He publishes an informational blog for consumers to provide insight and analysis to all major loan types as well other topics such as credit history, that most consumers will face.