In the United States, student loans can be obtained either from the federal government or from private sources. Terms surrounding student loan repayment vary with the type of program.
Since the passage of the Health Education Reconciliation Act of 2010, all public student loans are directed through the Federal Direct Loan Program. The lender is the U.S. Department of Education, which has displaced banks and other financial institutions in this capacity.
Federal student loans are the most basic way for students and parents to borrow funds to help pay for college. The loans can be used for tuition, fees, room and board, transportation and supplies. When you apply for a federal student loan, the funds are directed to you through your school.
One feature of student loan repayment is deferment. Students do not have to begin repaying loans until six to 12 months following the end of their studies. Students who remain enrolled at least half time can continue to defer their student loans indefinitely.
The loans themselves are offered at attractive low fixed rates, usually a couple of points below commercial rates. Beginning in 2014, students who qualify can cap the amount of student loan repayment each month to ten percent of discretionary income, a reduction from the current cap of 15 percent. Besides income-based repayment plans, there is a loan forgiveness program that activates after 20 years of repayment.
Once, students felt victimized by the old system in which banks acted as the middlemen in the student loan program. They complained about complex rules and surprise extra costs. Those days are gone now that all government loans come directly from the Department of Education. It is estimated that $6 billion was saved by eliminating banks and other financial institutions from the government student loan program.
Because the terms of federal student loans are so good, the Department of Education recommends that all federal aid be exhausted before a student turns to private loans.
Students request federal student loans through the online Free Application for Federal Student Aid (FAFSA). The application allows you to indicate the schools you are thinking about attending. The Department of Education will process your application and the notify each of the schools on your list. Each school then contacts the student and informs him or her how much financial aid is available. This aid comes from scholarships, grants, work/study programs and federal loans. If you decide to take a federal student loan, the next steps in the process will be forwarded to you by your school.
© 2011 Hedge Fund Writer LLC
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