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STUDENT LOANS
the before and after

College students and parents should carefully look at all the features of loan programs available to them before selecting a loan provider.   Loan programs look alike, but can have significant differences that are not recognized until graduation and repayment time arrives.   

What is a Government Loan?
Many students rely on federal government loans to finance their education.  These loans have low interest rates and unlike private loans, do not require credit checks or collateral.  The federal loan program for students is called the Stafford Loan and consists of either the Federal Family Education Loan (FFEL) Program or the William D. Ford Federal Direct Loan (Direct Loan) Program.  FFEL loans are provided by private lenders, such as banks, credit unions and savings and loan associations.  These loans are guaranteed against default by the federal government whereas Direct Loans are provided “directly” by the federal government.

Which loan is best for you?
Federal loans are generally accessed first.  Based on your financial need, you may qualify for a “subsidized” loan, which means the government pays the interest while you are in school.   All students are encouraged to complete the FAFSA (Free Application for Federal Student Aid) form to determine eligibility for either a subsidized or unsubsidized Stafford loan.  The family’s ability to pay college expenses is also determined by the FAFSA and students could qualify for additional financial aid beyond the limits provided by the federal loan or grants and which may not be based on financial need.

If your borrowing needs are not met by the college or the federal programs, however, private lenders offer a variety of supplemental loan programs known as Private or Alternative Loans. 

How to choose a loan
It is important not only to compare the interest rate of the loan while you are in school, but also to look at how the loan program you select will affect you when you are in repayment.  Consider these loan repayment differences:

Interest rate discounts:  The Direct Loan program offers a .25 percent interest rate reduction if your payment is automatically taken out of your bank account.  Beginning with the 2000-01 school year, there is an upfront rebate amount equal to 1.5 percent of the loan amount borrowed on all Direct Loans to include the PLUS loan for parents. 

Some Stafford loan lenders offer a discount ranging from 1.25 percent to 2.25 percent, but the majority of the discount does not begin unless your payments are automatically taken out of your bank account and are made on time for one to four years.   Depending on when the interest rate discount actually goes into effect will determine your savings. 

The Missouri Higher Education Loan Authority (MOHELA) program, which services FFEL loans, offers a 2.0 percent interest rate reduction beginning with your first payment if it is automatically taken out of a bank account.

Repayment plans:  The Direct Loan program includes a standard plan (a fixed amount for up to 10 years), an extended plan (fixed monthly amount for up to 30 years), a graduated plan (payments start low and increase every two years), and an income contingent plan (each year your payment is based on your family size and adjusted gross income).  FFEL repayment plans include a standard and graduated repayment plan, but cannot be extended beyond 10 years.  Their income sensitive plan can vary by FFEL lender. 

Consolidation:   Any government student loan (either Direct Loan or FFEL Loan as made by a bank or credit union, etc.) can be consolidated.  The only requirement is that a borrower must have at least one original or underlying loan with either the federal Direct Loan, a lender, or a secondary market which offers FFEL consolidation.  Borrowers must consolidate with one of their original lenders, unless that lender declines to offer consolidation.  Both the direct loan program and major secondary markets, like MOHELA, offer consolidation.  The consolidation interest rate will be based on the rates you pay on the original loans.  Before you borrow, think about getting maximum benefit by choosing a lender offering the lowest repayment rates. 

FFEL borrowers may not consolidate until they leave school and all their loans are in a grace period (6 months after graduation) or in repayment.  Direct Loan borrowers can consolidate while they are in school.  If you consolidate your loans, however, you may not be able to defer your payments if you choose to go back to school to continue your education.

 For more information on these assistance programs, e-mail Janet Goeller or call her at 573-751-1191.