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Student Loans - How to Shop for a Student Loan - Federal Backing and Private Financial Aid

June 28th 2006

Student Loans - How to Shop for a Student Loan - Federal Backing and Private Financial Aid

Yale University

Unlike some other financial aid programs, student loans must be paid back. There are several types of student loans available in the United States.  The first is the Federal Student Loans made to the students directly (1).   There are no payments until after graduation, but amounts are quite limited.  The second is the Federal Student Loans made to the parents (2).  They have a much higher limit, but payments start immediately. The third type is the Private Student Loans made to students or parents (3).  These have higher limits and no payments until after graduation.  Usually the interest will start to accrue immediately though.

The first type of student loan is made directly to the students and is used to supplement personal and family resources, scholarships, grants and work-study.  These loans can be subsidized by the Federal government or may not be, depending on the students needs. 

 

These loans are guaranteed by the U.S. Department of Education either directly or through guarantee agencies.  Regardless of credit score or other financial issues, nearly all students are eligible for receiving these loans. 

The subsidized Federal loans are offered to students with a demonstrated financial need.  This means they generally requiring a low family income.  Here the Federal government will make the interest payments while the student is in school.  This benefits the student because if they borrowed $10,000, they will owe $10,000 at graduation. 

The unsubsidized Federal student loans are guaranteed by the U.S. Government as well.  But here the government does not pay the interest, so interest will accrue while the student is going to school.  So if there was $2,000 in interest accruing, the student that borrowed $10,000 would have a balance of $12,000 at graduation. 

 

The second type of loan is made to the parents.  There is no grace period.  The payments are made immediately.  The parents are the ones responsible for the loans. 

Parents are advised to consider "year 4" payments, rather than "year 1" payments. What sounds like a "manageable" debt load of $200 a month in freshman year can mushroom to $800 a month by the time 4 years have been paid for through borrowing. The combination of immediate repayment and the ability to borrow substantial sums can be dangerous.

The third loan is made by banks and specialized lending institutions.  Payment of these loans may be delayed until after graduation.  These rates are usually higher than government loans but lower than other non-specialized loans.

 

Watch for the overhead and origination charges in these loans. The interest rate may vary depending on the credit score of the barrower.  Like everything else, you should shop around for he best deals.  

 
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Dan Wilson
Best Syndication

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