US Based Student Loan Guide

Student Loans - What Is Financial Aid?

Over the past 40 years, just as with everything else, the cost of education has risen dramatically. Average tuition increases of more than 6% per year are common today. Just as one example, in 1973 the cost of registration at UCLA (University of California, Los Angeles) was $208 per quarter. It is now over $2,300 per quarter.

That ten times increase is not too unusual - many things cost ten times what they did a few decades ago. Income, on the other hand, has risen about three times in the same period, from about $15,000-$30,000 per year to around $39,000-$42,000. The numbers vary by gender, age and more but as a rough guide, the lower range ~3:1 ratio is about right.

Now for the good news. There are more types of financial aid available today to students and parents than there ever has been. Financial aid, as the name suggests, is money that students and their parents get from scholarships, Federal and private lenders and a few other sources, to aid students in paying for education.

Once upon a time, students could depend almost entirely on Pell Grants and Stafford Loans to finance education costs, if not complete living expenses. Pell Grants are still given, but they're need-based and represent a small percentage of the education cost today. Stafford Loans are also need-based, and can range from 25%-40% of the average cost of financing school. Perkins Loans are similar, but reserved for the lowest income families.

Fortunately, PLUS Loans are available, which was not an option 35 years ago. These are loans to parents, not students, to help pay for the student's education. The interest rates are average, and there are certain restrictions and fees, but they often form part of the total package.

A word to the wise about fees in general. Many loans are nominally for a specified amount, say $4,000 per year disbursed in two payments (one per semester). But it's not uncommon for up to 4% in fees to be deducted from that amount before any funds are distributed. That 4% on $4,000 equals $160 you never see, yet have to repay. Be sure to look for low or no-fee loans.

Though Federal loan programs, like the subsidized Stafford and others, carry no credit check and low fees and interest is paid by the government, they are not the only source of financial aid today.

The average financial aid package today will be a complex mixture of grants, scholarships (if possible), Federal and (probably) private loans. Rates range from 5% (Perkins) to the more common 6.8% or higher. With the recent large increase in defaults on sub-prime lending (mostly for mortgages), lenders are going to be more strict than before about credit history and income.

The best way to get started is to look at tables of the most common loan programs, what interest rates and fees they carry along with any eligibility requirements. One excellent site that summarizes much of that information can be found at http://www.finaid.org/.

Student Loans - Subsidized and Unsubsidized Student Loans

Obtaining student aid can be more complicated than playing the stock market. There are literally hundreds of possible scholarships, loan programs and other forms of assistance. But for the overwhelming majority a Federal student loan program is the most likely source of funds to help pay for school.

Most of that money loaned is associated with one of only half a dozen programs. Stafford (for students) and PLUS (for parents) with a couple of variations cover most circumstances. But beyond the program names/types themselves, there are two common categories that those seeking funding should be aware of. Which you choose can have a substantial financial impact down the road.

The two categories are: subsidized and unsubsidized college student loans. Students generally make no payments on either type until six months after leaving school whether they graduated or not. But because of the fact that interest amounts are calculated on the outstanding principle (the loan amount), it can add up to a substantial sum over a period of years.

Subsidized loans are a type in which the government pays on behalf of the student any interest accumulated on the loan during the years attended. Neither the student nor any co-signer, such as parents, accumulate interest on the principle while the student is in school. The clock only starts ticking six months after leaving.

Unsubsidized loans are the opposite. Though payments may or may not be due during school years, the interest is calculated from the day the loan is funded. Even at a modest amount, say $1,000, at 6% per year a student can incur an additional debt of $60 the first year. That doesn't sound like much, but that $60, if left unpaid is added to the principle. The following year the interest is %6 of $1,060 or $63.60.

The example is greatly oversimplified, since interest is calculated monthly not annually and so the amount actually rises much faster, in fact exponentially. The interest amounts are typically much larger, too, since loan amounts can easily be 20 times or more than the example. A simple loan calculator will allow the prospective borrower to run through some sample scenarios.

Many loans are a mixture of subsidized and unsubsidized and funds may come partly from a Stafford loan, partly from a PLUS loan, or a number of other possible types and sources. Some students may not qualify for certain Federal student loans, because of parents' income or other reasons. In that case, private loans and other funding sources have to be relied on.

The only way to know for sure is to fill out the standard FAFSA (Free Application for Federal Student Aid) application, available at: http://www.fafsa.ed.gov/

Using that, in conjunction with the required accompanying documentation - showing parents and student income, credit histories, current debt loads and other information - loan officers make a decision about whether or not to grant the loan.

Most students will qualify for at least some aid.

Student Loans - Stafford Student Loans

Stafford loans are part of the FFELP (Federal Family Education Loan Program) established by Congress in 1965 to supply financial aid to students. Originally intended to cover those 'in need' where the quotes indicate that the definition was somewhat loose even then, it rapidly expanded. Today, Stafford loans provide over 90% of the more than $50 billion dollars distributed every year within the various FFELP categories.

One way the definition of need was quickly broadened was to create two different kinds of Stafford loan: subsidized and unsubsidized.

In the first case, the Federal Government pays any interest that would normally accrue from the time the loan is originated until payments begin. Normally, no payments are due while the student is in school half-time or more, and for a six-month grace period after leaving. Students can request payments to begin earlier.

Since the interest is subsidized, these loans are generally need-based, meaning that aid officials look to student and family income in deciding whether the student qualifies. A number called the EFC (Expected Family Contribution) is used, by examining income information provided on the FAFSA (Free Application for Federal Student Aid) application. Available at: http://www.fafsa.ed.gov/

About two-thirds of all subsidized Stafford loans are provided to students whose parents have an Adjusted Gross Income of under $50,000 per year. Another 25% are awarded to those in the $50-100,000 per year range. But the definition of 'needy' is indeed flexible, since slightly less than 10% of subsidized loans are granted to students whose combined family income is over $100,000.

For those students who don't qualify for subsidized loans, most will be eligible for an unsubsidized Stafford loan. Keep in mind, though, that the interest accumulates from the day the loan money is disbursed until the day it's paid off. Even in the case of a modest $4,000 loan, at 6.8% the first year of interest is approximately $230. That $230 is then added to the $4,000 and interest charges calculated on the higher figure.

Actually, the example is a little oversimplified, since amounts are calculated monthly not annually. The exponential equation underlying it is a little complex, but sample scenarios can be played with by using a loan calculator. A popular one is available at: http://www.bankrate.com/brm/mortgage-calculator.asp.

Since $4,000 is a very low amount as student loans go, the numbers can actually be quite a bit higher. The average undergraduate student (and/or parent) borrows about $15,000 per year in a mix of subsidized and unsubsidized Stafford and other sources.

A detailed breakdown of what can be borrowed by who is available at: http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp or http://www.salliemae.com/get_student_loan/find_student_loan/undergrad_student_loan/federal_student_loans/stafford_loans/ Fees apply to fund the loan, so students will actually receive less than the stated amounts.

Student Loans - Seeking Advice

Despite high education costs and the cost of borrowing to meet them, students and parents have some advantages today that didn't exist even ten years ago. The Internet has changed the way financial aid is researched (and granted) in more ways than one.

Today it's easy to quickly access an enormous amount of information. Interest rates, qualifying criteria, loan limits and much more is readily available. But that also hints at one of the difficulties of easy data - the possibility of too much of it. The old saying in the information technology business sums it up best: it's like drinking from a fire hose.

Having so much information flood in, especially given the variety and complexity of loan programs today, can make analyzing it all that much more difficult. To overcome that problem, one aspect of the old-fashioned methods is still very helpful: seeking personal advice.

For students still in high school, planning a college education and seeking ways to pay for it, the school counselor is a good first start. These professionals are there to help students sort through the bewildering array of choices, and to point out some of the potential advantages or pitfalls of different ones. But, unfortunately, the quality of that advice can vary quite a lot.

Professional loan counselors are not only up on the latest information, but go through regular courses each year to keep up-to-date and keep their professional standing. But, the downside is that they usually charge for their services. A few minutes of advice on the phone or in person is typically free, but any detailed program is for a fee. That's understandable, since that's how they make a living.

The online versions of professional loan counselors also have similar pros and cons. Since there's so much variety on the web today, finding a trustworthy source can be tough. The advantage of personal contact, which enables judging their reliability by hearing their voice or seeing their face, is missing. But with social networks and blogs growing so much the past few years, that drawback has largely been outweighed.

It's possible today to get dozens of reliable recommendations from individuals you interact with regularly. When reading comments by new forum members it can be hard to judge the worth of his or her opinion. But over time, you get to know who is providing objective and reliable information. Before long, you can locate one or more professionals to get more in-depth advice.

One place to start is with a site such as http://www.finaid.org/ or http://talk.collegeconfidential.com/forumdisplay.php?f=7

Be sure to allocate at least a year to consider the available options, two years would be better. Saving and planning can and should start much earlier, of course. But getting information that is likely to be useful means not putting too much weight on circumstances that exist several years before beginning college. Interest rates, available programs and qualifying criteria do change over time. And, who knows, the Internet innovators may come up with something even better in the future!

Student Loans - Scholarships

A scholarship, as distinguished from a student loan, is money given that does not have to be repaid. There are scholarships for academic high-achievers, athletes, Pacific Islanders and children of local widows. In short, there is a type of scholarship to suit any possible circumstance.

The trouble is finding them.

Most scholarships are academic oriented. They require excellent grades. But that is often just the first cut. In order to win out over those with similar GPAs or SAT scores, the student often has to have other elements in his or her background. Sometimes that's an award from Westinghouse or other science-based competition. But it could be having a history of community service. The variations are endless.

One of the easiest ways to get started is to speak with a school counselor, to find out what's available. But take what they say with some skepticism. They're often overworked and not aware of the latest information. Continue that research by doing some web searches and dig into the thousands of possible scholarship programs.

Two of the larger sites that have massive, up-to-date information are FastWeb (www.fastweb.com) and CollegeAid.com (www.collegeaid.com/college-scholarship-search.html). Both have long lists of scholarship programs with amounts and a brief blurb on application requirements or criteria. In some cases, the initial criteria are as simple as having (or expecting soon) a high school diploma and being a U.S. citizen. Others require acceptance at a university and a specific residence.

There are scholarships for the children of veterans, for those who intend to major in Health Sciences, or those who are residents of Virginia, just to name three. Most require good grades, but not all. Many require the student to be from a low-income family, but others look to ethnicity. In other words, they cover the entire spectrum of possibilities.

Some scholarships require evidence of more than just an outstanding grade point average or good test scores, or facts about personal background. Some will require that the prospective winner write an essay, as short as 250 words or as long as 5,000. The essay may be oriented toward listing personal achievements or merit, or the grantors may want to find out the prospect's views on the world. Here again, they run the gamut.

Most scholarships are free, in the sense that the money never has to be repaid. But it isn't always the case that the recipient receives or gets to keep the entire official amount. Some are taxable. According to the IRS, the following criteria apply to scholarships, with respect to taxability

Qualified scholarships and fellowships are treated as tax-free amounts if all of the following conditions are met:

- You are a candidate for a degree at an educational institution,

- Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies and equipment required for courses of instruction,

- The amounts received are not a payment for your services.

See also http://www.irs.gov/faqs/faq4-8.html

The only way to find out what's out there, and if you're qualified or have a chance to receive one, is to dig into the different programs and start applying. It's a lot of effort, but it just proves once again that there really is no such thing as a free lunch. Good luck!

Student Loans - Private Student Loans

Many of the common Federal student loan programs require no credit check and provide substantial sums for financial aid. Unsubsidized loans, in which any interest accrued while the student is in school making satisfactory progress, are among the most desirable.

But these programs are need based and often carry other criteria that make it difficult to qualify. Even when students (and parents) do qualify, the loans only cover a portion of the total cost of education, in many cases. When students and their parents find themselves in that situation, they can turn to private loans to make up the difference.

Private loans, too, have pros and cons, however. A credit check is almost universally required. For those with a good credit history that's no problem. But 'good' is a relative term and if it isn't good enough, borrowers will find themselves paying higher than optimal interest rates.

Beyond the stated interest rate, there are other financial implications of private loans. Fees are often tacked on (or, rather taken off) nominal loan amounts. A relatively modest loan of $4,000 may easily have 4% in fees applied prior to distribution. That means $160 of the total is never seen by the borrower, but must be repaid. As a rough guide, every 3% of fees is equivalent to an additional 1% on top of the stated interest rate.

Private loans do have certain advantages, however.

The obvious one was alluded to above: the funds are available. Private lenders exist to make a profit on the interest and fees they charge. They have an interest in making money available to borrowers. As a consequence, they will work very hard to ensure that every applicant qualifies. Federal lenders, on the other hand, have an inflexible set of criteria and there is typically no real appeal if your application is denied.

Not having to deal with that impersonal, often illogical, bureaucracy is another advantage of private loans. Lenders maintain customer service departments that, though understaffed, exist to answer questions so that customers can get answers. Federal loan programs typically have contacts and help available as well. But the answers one gets are hit or miss in terms of quality.

But many other practical considerations apply that make private loans desirable.

Neither students nor parents have to fill out the FAFSA (Free Application for Student Aid) form(s), nor supply the same supplemental documentation. Private loan applications tend to be simpler and the whole process easier. But, fees and interest rates may be higher or lower depending on the individual program.

The most desirable private loans will have no fees and interest rates that are about equal to the prime rate – 1%. The 'prime rate' is the rate banks charge one another or their largest, most favored customers. Getting a rate at prime is a good deal, getting a rate at 1% below prime is a great deal. But be sure to check for any fees. As described above, fees can substantially add to the total cost of the loan.

To get that type of loan it's usually necessary to have a great credit history and/or get a loan with a co-signer who has excellent credit. That situation may or may not apply to you. The only way to know for sure what is available is to dig into the specifics. One great place to start is to look at the table on a site such as http://www.finaid.org/loans/privatestudentloans.phtml

Use a loan calculator, such as that available at http://www.bankrate.com/brm/rate/calc_home.asp to run through some sample scenarios, once you have some figures in hand. Be sure to include all the actual costs over the lifetime of the loan, to get a picture of the real cost.

Student Loans - PLUS Student Loans

With the rising cost of education over the past few decades, reliance on traditional Stafford loans has often failed to cover even the majority of expenses. The PLUS (Parent Loans for Undergraduate Students) loan program was designed to close that gap.

Though the interest rate is higher than other loans, the cap on borrowing is much more flexible and the loans are not need-based.

For the FFEL (Federal Family Education Loan) program, in which private lenders fund the loan, the interest rate is 8.5%. Through the Direct loan program the U.S. Dept of Education funds the loan directly at 7.9%. The difference of 0.6% can be substantial over the lifetime of the average loan. In the first year alone, on a 10-year loan of $25,000 it amounts to approximately $2050 - $1920 = $130 in interest.

For an exact calculation, experiment with some sample scenarios by using a loan calculator such as the one available at: http://www.bankrate.com/brm/mortgage-calculator.asp

With PLUS loans parents can borrow up to the total cost of education, minus any other financial aid amount the student is awarded. Though PLUS money is not cheap, it can make a difference when choosing which school to attend or whether to attend at all.

However, since PLUS loans are not need-based, they do require a credit check. In this case, the student's credit (with one exception discussed below) is not considered. The parents' credit history is what matters, since they are the signers of the promissory note. They alone are responsible for repayment of the loan.

In those rare cases where the credit history of the parent(s) makes them ineligible, a co-signer can participate in the loan. A relative or other party can agree to guarantee repayment and take on the legal responsibility as a co-borrower. With the recent difficulties in the sub-prime borrowing arena, however, those cases are unfortunately less rare than they have been. That suggests that in borderline cases, the need for a co-signer is more likely.

Apart from changes in interest rates, another recent change to the program is to allow professional and graduate students to qualify for PLUS loans. The same interest rates and eligibility criteria apply. Like other students, they must be enrolled in an eligible institution and program at least half-time.

Unlike many Stafford loan programs, repayment of a PLUS loan begins right away, typically within 60 days after the loan funds are disbursed. Interest begins accumulating from the time the first disbursement is made. Both principal and interest are paid in regular monthly installments while the student is in school. Payments are made to the private lender in the case of FFEL (Federal Family Education Loan) loans and to a U.S. Dept of Education servicing center in the case of Direct loans.

Be sure to calculate carefully all the costs associated with obtaining a PLUS loan, and look on it as a loan of last resort. Even a home equity loan, for example, might well be less expensive since the interest is tax-deductible.

Student Loans - No Credit Loans

Having a poor credit history is never an advantage. Fortunately for students and their parents, though, there are a number of loan and aid packages that don't look at credit status at all. Several Federal loans consider only need or other factors, and ignore any credit history entirely, good or bad.

Pell Grants are one of the oldest, and disbursing them is based primarily on the economic status of the grantee. If the student and his or her parents are a low-income family, Pell Grants are almost automatic. Almost. As with any form of Federal aid, that economic situation has to be demonstrated through supplying documentation.

Those in charge of disbursing Pell Grants use a number, called EFC (Expected Family Contribution), to decide whether to give the money. Other factors also come into play (such as the cost of tuition and more), providing a rounded picture.

The grant is a gift, not a loan and is currently a maximum of $4,050 per year. That may seem like a substantial sum, and it certainly helps a great deal. But with annual tuition upwards of $5,000-$10,000 or more it doesn't cover everything.

Most students, therefore, will want to seek a loan in addition to a Pell Grant to fund their education. There are many that are similarly need-based. One of the most common are Stafford Loans, which come in two types.

The first type of Stafford Loan, and the most desirable, is called 'subsidized'. The term comes from the fact that the government pays any interest that accrues during the period the loan is not being repaid. That period is typically while the student is carrying a half-time or greater load of classes, and for the first six months after leaving school.

The second type is 'unsubsidized' in which the student is responsible for any interest on the outstanding principle. If paid in installments while attending classes, it may be modest. A $4,000 loan paid over 120 months carries a monthly payment of $42.43 at a 5% interest rate. The interest portion is roughly $9 per month. If it accrues unpaid over several years, though, it can add a substantial amount to the total repayment after graduation. Any unpaid amount gets added to the prinicple, with the interest rate applied to the total.

The advantage, however, of the second type is that they are almost always available to any student. In most cases, they won't cover more than about 25%-40% of the total costs, so students will need to supplement the loan with other sources of funds.

Limits range from $2,625 ($3,500 starting July 1, 2007) the first year, rising to $5,500 for the 3rd and 4th years, for dependent undergraduate students. Independent students can borrow up to $10,500 per year. Graduate students may borrow up to $18,500 ($20,500 starting July 1, 2007), with a total of $138,500 over the lifetime of the education.

A detailed breakdown is available at: http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp and http://www.salliemae.com/get_student_loan/find_student_loan/undergrad_student_loan/federal_student_loans/stafford_loans/ Fees apply (up to 4%) to fund the loan, so students will actually receive less than the stated amounts.

Perkins Loans are another type of 'no credit required' student loan. A low interest rate loan (currently 5%), it allows dependent undergraduate students to borrow up to $4,000, with a cap of $20,000 total. Details are available at: http://studentaid.ed.gov/students/publications/student_guide/2005-2006/english/types-perkinsandstaffordloans.htm.

Student Loans - Interest Rates, Now and Future

Variable vs Fixed

Not too many years ago interest rates on Stafford loans and other programs changed from fixed rate to variable rate. Then, as of July 1, 2006 they changed back to fixed again.

But they can change again. What the Government does, it can undo. Also, because lenders have some flexibility, even official rates can be altered in subtle ways. Many lenders, for example, charge the Federally established origination fee of 3% and the default insurance rate of 1%. Others are willing to absorb those costs to get your business. As a rough rule of thumb, every 3% in fees is equivalent to approximately 1% in interest rate.

Rates and Interest Amounts

Though the interest rate changes can be modest, PLUS loans increased from 6.1% to 8.5%, for example. On, say, even as low as $16,000 borrowed, a 2.4% rate difference equals (approximately) a $400 difference in interest charges the first year alone.

For exact amounts, per month, run sample scenarios using a loan calculator, such as that at http://www.bankrate.com/brm/mortgage-calculator.asp

The Future

There are no guarantees. The rates can change, since they're similar to variable rate home loans, even after the loans are funded. Predicting interest rates, both near term and long term, is a task that challenges even the finest financial experts. If it were otherwise, the bond market would be a pretty dull affair (which it's not). So, the best the average student or parent can do is to look to what those experts are predicting.

Follow The Leaders

Among the easier ways to follow those predictions is to look at various interest-bearing financial instruments, such as T-Bills or long-term corporate bonds. By examining those numbers, potential borrowers can get the best available guess about where interest rates are headed. That information is easily gained from any finance website, such as Yahoo Finance or some other personal favorite.

Looking at the 30-year Treasury bill, for example, shows two things: what the government is offering to sell debt for projected out over 30 years, and what the buyers of that debt are willing to pay. As that rate varies, most other long-term rates, such as student loan rates, will vary similarly (though not always exactly).

Corporate Bonds

The same can be said of certain corporate bonds. Ford Motor Co., for example, has been in financial difficulty for the past few years and that fact is reflected in their bond rates and ratings. Their quality ratings have dipped to near junk bond level, and the rates are significantly higher than average. Many are over 10% coupon rate, a full 5% above money market rates. For most of the large, older, 'blue chip' corporations, their bond rates on long bonds (over 10 years) are a good indicator.

Keeping Up

As rates rise, it becomes more difficult for borrowers to pay back the loan. Not only does that cost students and parents more money, but it can make it more difficult to qualify since the higher numbers are factored into lending decisions. Stafford and many others are need-based so it's not a factor there, but interest rates of one program tend to influence others which may be credit history based.

In a volatile market, the best strategy for many students and parents is to obtain a private loan at a fixed rate. The best loans cost Prime Rate – 1%. That's a very good deal, but borrowers will need very good credit to qualify.

There's no ideal solution to financing the high cost of, and the high cost of borrowing for, education today. But, as with any cost, shopping around to find out all the available options is the best bet for the long-term.

Student Loans - Graduate and Undergraduate Financial Aid, Similarities and Differences

The costs of education today are ten times what they were less than 40 years ago. But those differences become even more stark when considering undergraduate versus graduate programs. Fortunately, there are resources available to both types of student to help them pay for college.

Undergraduates typically rely on a complex mix of scholarships, grants and loans. Those loans are sometimes taken out by undergraduates alone, others by their parents alone, sometimes a mixture of the two as when the parent becomes a co-borrower or co-signer.

The most common programs for students remain the unsubsidized and subsidized Stafford Loans. Subsidized loans are the most desirable, since the government pays the interest while the student is in school. But they are need-based. Unsubsidized loans are not need-based, making them available to a much wider group of students.

A detailed breakdown of what can be borrowed by who is available at: http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp or http://www.salliemae.com/get_student_loan/find_student_loan/undergrad_student_loan/federal_student_loans/stafford_loans/

Graduates, on the other hand, often have fewer options for scholarships and grants just at the time when tuition costs jump. But teaching and/or research assistantships usually more than make up the shortfall. They, in effect, have very low-paying (and very long hour) jobs while attending courses and doing research.

Recently a new option has become available to graduate students: PLUS loans. Though the acronym stands for Parent Loans for Undergraduate Students, they are now an option for many grad students. In the undergraduate case, parents are the borrower and are responsible for repayment. In the case of grad students, they become the responsible party.

PLUS loans have several advantages.

First, they're available. Since they're based on credit quality, not need-based, most borrowers can qualify. Relatively few grad students have had time to get into the credit binds that working adults often fall into. As a result, though their history may be sparse, they usually have few bad marks on their credit report. That makes the decision easier for college financial aid officials, who determine eligibility.

On the other hand, current interest rates for PLUS loans are not low by historical standards. Rates are either 7.9% or 8.5%, depending on the specific type. Even at the lower rate, on $10,000 borrowed the first year interest amount is over $750 and payments start within 60 days of when the funds are disbursed with no grace period.

Caps on undergraduate and graduate loans, for all non-private loans, differ as well. Even the maximum amount over the lifetime of the program varies between undergraduates and graduates.

Both types of students will need to research all available options. But keep in mind that, though it commonly requires a combination of funds from several sources, money to pay for school is now more available than ever. The total funds borrowed last year by all students was over $50 billion. That money is going to someone. It can easily be you.

Student Loans - FFELP - The Federal Family Education Loan Program

The FFELP (Federal Family Education Loan Program) is a Federal Government-private lender partnership and umbrella program that includes Stafford, PLUS and Perkins loans. Established by an Act of Congress in 1965, it began in 1966. Since then, over half a trillion dollars have been disbursed, over $50 billion in 2006 alone.

Funds for Stafford, PLUS and other FFELP loans are provided through a large network of independent banks, credit unions and other financial institutions. Lenders can feel confident loaning money to what otherwise might be high credit risks because the funds are ultimately guaranteed (at least in theory) by the Federal Government.

Private guarantors may get involved, however, in the approximately 5% of cases where the loan goes into default. Guarantors then apply to the Federal Government for (at least partial) reimbursement of any lost funds.

Over 90% of the funds are directed through the two types of Stafford loan, unsubsidized and subsidized. In the latter case, the Federal government pays for interest on the loan accrued while the student is in school and for six months afterward. Unsubsidized loans make the borrower responsible for any interest. If the interest is deferred (as it frequently is) until after the grace period, it's added to the principal.

The other major program, the PLUS (Parent Loans for Undergraduate Students) loan program, supplies over $8 billion per year in funds to parents. As of July 1, 2006 professional and graduate students are also eligible. Providing money to parents to help cover expenses they would frequently pay for anyway, the PLUS program forms a common part of the total financial aid package today.

In general, all the programs require a FAFSA (Free Application for Student Aid) application to be filled out. The data provided forms the core that allows loan officers to make a funding decision. Typically those decision makers are employed by the individual college at which the student is accepted. Forms are available at: http://www.fafsa.ed.gov/

The financial aid department will make a recommendation for a total package based in part on the EFC (Expected Financial Contribution) of the student and his or her parent(s). Examining income, they aim to supplement any unmet need with a combination of subsidized and unsubsidized Stafford loans and other sources.

Once the student and/or parent accepts the package the funds are disbursed, usually twice per year once each semester, more often in quarter systems. Often the largest share of the money will go directly from the private lender to the school to pay for tuition and more. The remainder is then provided to the student or parent, minus any fees.

Those fees can range up to 4% or more. Many programs will charge a 3% 'origination fee' and a 1% insurance fee, which they assign to requirements of the Federal government. Fees as high as 8% are not unknown, though, so shop around.

Student Loans - The William D Ford Direct Loan Program

The Direct loan program began about 15 years ago and, in true American fashion, was designed to cut out the middle man. Instead of having banks, credit unions and other private businesses lend money to students and parents, the Federal government loans the money directly.

Direct programs overlap the alternative, called FFELP (Federal Family Education Loan Program). The latter is the acronym for programs that work through private lenders. Since they duplicate in some ways the FFEL programs, it's important for lenders to target which they want. Both offer Stafford and PLUS loans.

Direct loans have the same criteria for eligibility. They follow the same need-based guidelines, or have the same credit check requirements for non-need-based programs. Providing the same programs according to the same standards raises a natural question: how to decide between them?

In part, the decision involves choosing which of two servicers to deal with. Both provide customer service personnel to answer questions. In some cases, the private lender will be more flexible and helpful and the government more bureaucratic or indifferent. In others, the situation is reversed.

Reading some of the forums may be the best way to get more information about which would suit an individual best. One large and popular such site is: http://talk.collegeconfidential.com/forumdisplay.php?f=7

With the growth of social networks it has become easier to get a diverse set of opinions. Many of those views are based less on objective criteria than personal taste. Reading the posts will quickly allow a person to decide which side they favor.

More concrete differences between the two broad types do exist, though. Since FFELP loans are funded and serviced by private financial institutions who you sign a promissory note to may not be who you repay. It's common practice for lenders to 'sell' loans to other companies. Mortgage companies do that all the time.

You may have gone to the trouble to find a lender you like. You might choose beyond the rate and repayment terms preferring their customer service, for example. But if the loan is sold to another company, you may be repaying a company you rejected. In the case of Direct loans, since the Federal government is the lender, the loans are not sold to another party.

The most important difference to most people, however, will be the possibility that rates, fees and repayment terms may differ between the two. Officially the interest rates of Stafford and PLUS loans are fixed. But private lenders have some flexibility in other areas.

They may or may not charge origination and insurance fees (officially assessed at 3% and 1%, according to Federal rules, which themselves are changing the next few years). Though the fees are still there, the lender may agree to absorb them in order to gain your business. They may alter the dates on which interest charges are calculated, or extend grace periods or lengthen the repayment period.

The only way to find out what is available is to shop around as you would for any other kind of loan. Calculate the total cost of the loan the way you would any other. To obtain information from the official government site see: http://www.ed.gov/offices/OSFAP/DirectLoan/index.html.

To apply online by electronically completing an MPN, or Master Promissory Note, application see: https://dlenote.ed.gov/empn/index.jsp

Like the other programs a FAFSA (Free Application for Student Aid) is still required. Forms available at: http://www.fafsa.ed.gov/

Student Loans - Credit History and Student Loans

Many common student loan programs are not credit-based. Stafford and Perkins are based solely on need and don't even do credit checks. But not all will qualify and those programs will often cover less than 100% of the needed amount, especially considering the high cost of education today.

Many students and their families will, therefore, want to supplement those with credit-based student loans. When they do, being able to show a good credit report to evaluators will result in better access to funds, with the best possible interest rate.

As with any credit-based loan, a prior history of bad credit doesn't make getting funds impossible. But it can be much more difficult and often carries a higher interest rate.

Avoiding bad credit history can therefore be the difference between getting a loan or, if you do get one, repaying much more than you would have with good credit. But what is good or bad credit?

The first factor any loan officer will consider is the FICO score. The FICO is a number calculated by the major credit agencies based on a secret, proprietary formula. Though the exact equation isn't public, several criteria are known, and even obvious.

FICO scores are based on outstanding debt and defaults, number of late payments and how late - 30 days, 60 days, 90 days or longer, amount of credit available, number of recent credit inquiries and other factors. All these are weighed and weighted so that, for example, a default counts very heavily, as do any late payments, with larger late days counting more. The number of recent credit inquiries counts less.

Many students won't have a FICO score at all, not having credit cards or other forms of loan that would generate the data on which the score is based. But the majority of students are judged by the parents' credit history, in regard to granting loans. While student credit history is important, the parents income and credit history typically count for more in making a final decision.

Both parties need to have good credit. First and foremost, that means a FICO of above 650, and the higher the better. Having a score lower than that won't make getting a loan impossible, but it may trigger the need to supply additional information that can influence the decision. And getting that extra data into the hands of actual individuals who can be influenced is not easy.

Apart from the FICO score, and related to it, there are a number of factors that prospective borrowers should keep in mind.

Paying on time is important. Evidence of a history of late payments, incurring late payment charges is evidence of a bad credit risk in the eyes of lenders. Staying within available credit limits is important, as well. Avoiding over limit and other penalties shows a willingness to defer immediate gratification and accept responsibility. Creditors are judging not just numbers, but character as well.

Limiting the number and maximum balance amount on credit cards can also help. Excessive credit inquiries suggest to lenders that someone is having difficulty meeting current debt loads. That's a signal that repayment of additional loans may be harder. That increases the lenders' default rates - loans that aren't repaid. Financial institutions will try very hard to keep that default rate low. To do that, they sometimes deny credit to borderline cases.

Meet all credit obligations and keep all borrowing to a modest level for a long period of time. That makes you look like a very good risk to loan officers, which means funding a student loan will be a slam dunk.

Student Loans - Co-Signer and No Co-Signer Loans

A co-signer is a second party who guarantees to repay the loan and usually becomes involved when the primary borrower has no or a poor credit history.

Students often have few or no credit cards, no car loans and very rarely a home mortgage loan. As a result, they have little or no credit history at all. And, as is the case with many of us in our youth, they may have made some unwise choices. They may have gone beyond what they could repay on a credit card and even been irresponsible about making payments.

That lack of credit history or, worse, actual late payments or defaults can easily put a potential borrower into the high risk category. Loan officers, even in Federal student loans programs, will often look at that with a cautious eye. Loan applications may be denied, or in borderline cases a higher interest rate is charged to offset the risk and compensate for higher default rates.

To counteract that lack of credit history or poor record, borrowers can and usually should obtain a co-signer. In the average case that will be one or both parents. Loan officers will look then at the parent's FICO score, outstanding debt to income ratio, repayment history and other standard factors in deciding whether to grant the loan.

At the same time, the credit quality of the parents becomes the primary factor for deciding the interest rate assigned. Those with a superior credit history typically get the best rates, while those with lower FICO scores usually pay a higher rate. The difference can amount of a substantial sum over the standard repayment period of 10 years.

For example, one popular co-signer program shows a 4% program paying $5,489 in interest over the life of the loan, rising to $10,647 at 6%. A 2% difference doesn't sound like much, but given contemporary borrowing amounts and compounding, such a scenario is not unrealistic.

For example, it isn't uncommon these days for students and parents to borrow as much as $100,000 to finance an undergraduate education. Even if interest is paid right away (so it doesn't accumulate while the student is in school, adding to the total to be repaid), interest at 6.8% is almost $567 per month. The annual interest total is almost $6,600.

Lowering that interest rate to 5% (the official amount for a need-based Perkins loans) reduces those numbers to $417 and $4,820. And keep in mind that the example assumes that repayment begins immediately. Deferring repayment until six months after leaving school, the most common scenario, will result in much higher amounts unless the interest is deferred or subsidized.

Using a co-signer with good credit can substantially lower the total interest paid, along with improving the chances of getting desirable loan features. Run through some sample scenarios by using a loan calculator such as the one from Bankrate.com.

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