Sources of Education Loans
By: Karen Rinehart, CFP^®
The Henssler Financial Group Position Paper

Perkins Loans

This is a low-interest loan that is made to undergraduate and graduate students with extraordinary financial need. The school the student attends is the lender; therefore, the student repays the school. Different amounts can be borrowed depending on the student's status (graduate versus undergraduate). The following are the limitations on the loan by status:

Graduate:
Can borrow up to $6,000 per year (total amount that can be borrowed is $40,000)

Undergraduate:
Can borrow up to $4,000 per year (total amount that can be borrowed is $20,000)

There are no charges with this type of loan, unless a payment is missed or is late. Repayment begins nine months after graduation, after the student leaves school, or drops below part-time status. You may have up to 10 years to repay the loan.

The school initially receives Perkins loan money from the government, then establishes accounts for students. The school sends the student a promissory note to sign and return to the institution.

Subsidized Federal Stafford Loan

Undergraduate and graduate students are eligible for a Subsidized Federal Stafford Loan, where the government pays the interest while the student is in school. The student must be enrolled at least part-time to receive the loan. The applicant must be a U.S. citizen or resident alien. Students must show financial need and must apply for a Pell Grant before they are eligible for this type of loan.

The interest rate on this type of loan is adjusted annually, and is based on the 90-day Treasury bill plus 1.7%. The maximum interest rate charged is 8.25%. The federal government pays the interest on the loan while the student attends school.

The repayment of the loan begins six months after the student graduates, drops out or is no longer considered a part-time student.

The maximum loan term is 10 years. There is a 2% origination fee and a 1% guarantee fee that is deducted from the loan. Each July the origination fee will decrease by 0.5% until it is completely phased out in July 2010. The maximum amounts that can be borrowed are as follows:

Undergraduate:

• $3,500 for first year;
  
• $4,500 for second year;
  
• $5,500 thereafter; and
  
• The maximum amount that can be borrowed is $23,000.

Graduate or Professional Degree:

• $8,500 per year; and
  
• The maximum amount that can be borrowed is $65,500.

Unsubsidized Federal Stafford Loan

Undergraduate and graduate students are eligible for a Unsubsidized Federal Stafford Loan, where the student is responsible for the interest until the loan is paid in full. However, interest payments can be deferred until after graduation. The student applying for the loan must be a U.S. citizen and must have applied for a Pell Grant and a Subsidized Federal Stafford Loan before applying for this type of loan.

The interest rate on the loan is based on the 90-day Treasury bill, plus 1.7%. The maximum interest rate charged is 8.25%.

The following are the maximum amounts that can be borrowed:

Undergraduate:
The maximum amount that can be borrowed depends on the dependency status and if the parents are eligible to borrow under the Federal Plus Program. If the student is a dependent and the parents qualify for a Federal Plus Loan, the following amounts apply:

• $3,500 for first year;
  
• $4,500 for second year;
  
• $5,500 for third, fourth, and fifth year; and
  
• The maximum amount that can be borrowed is $23,000.

If the student is independent or the parents of the dependent do not qualify for a Federal Plus Loan, then the following amounts apply:

• $4,000 for first and second year;
  
• $5,000 for third and fourth year; and
  
• The maximum amount is $46,000.

Graduate or Professional Degree:

• $10,000 per year.

The maximum term for the loan is 10 years. A 2% origination fee and a 1% guarantee fee applies, which is deducted from the loan amount.

Repayment of the loan begins six months after the student graduates, drops out or drops below part-time status. Monthly or quarterly payments for interest amounts are due once the loan is received.

Private Lenders

Private institutions often award loans to students to pay for college education. These loans are called Signature Loans. The student borrowing the funds must have a good credit rating in order to receive the loan.

These loans are available to graduate students, as well as undergraduates. The student must attend a four-year or five-year college to be eligible. The maximum amount that can be received is the total cost of college, less any financial aid received. The maximum amount that can be borrowed is $100,000.

Repayment of the loan starts six months after graduation or if the student's status drops below part-time. The loan is paid directly to the institution the student is attending.

Interest rates vary according to the student's credit rating. If the student has excellent credit, then the interest rate is Prime plus 0.5%, good credit rating is Prime plus 1%, and fair credit rating is Prime plus 2%. The term is between 15 and 25 years.

For more information on student loan lenders call 1(800) 831-5626.

College Sponsored Loans

Some colleges have their own loans that are available to students. The student should contact the school's financial aid office to inquire if the institution they are attending offers loans.

Other Loans

Some private organizations and foundations have loan programs in addition to scholarships. To inquire about this type of loan, go to www.scholarships.com. These loans are available to both parents and students.

Federal Plus Loans

This type of loan is available only to parents of undergraduate students. It is a loan sponsored by the Federal government. The student must be enrolled in college at least as a part-time student. The borrower must be a U.S. citizen or resident alien and have a good credit rating.

The maximum amount that can be borrowed is the cost of college, less the amount of financial aid being received.

Plus loans are based on your credit rating, and interest is variable and adjusted annually by the Department of Education.

Repayment of the loan begins 60 days after the borrower receives the first payment.

• www.collegeboard.com
  
• www.scholarships.com

For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.