Federal loans: Almost everyone can get one

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For most families, money plays a big part in the decision on where to go to college. At some point, most of them will get some help from Uncle Sam to pay the bill.

In its most recent study of student financial aid, the National Center for Education Statistics reported that a full three of four full-time undergraduate students got some kind of financial aid. About half of all full-time undergraduate students took out a federally guaranteed student loan, and just fewer than 10 percent of parents of dependent, full-time students took out federal Parent Loans for Undergraduate Students, commonly known as PLUS loans.

With some notable exceptions, federally guaranteed loans are easy to get and the interest rates and terms for repayment are very attractive, especially for families who make too much money to qualify for need-based grants and scholarships, and don’t want to divert funds that are in other high-yielding investments.

So what’s available and how do you qualify?

Student loans
For students, the most common form of federal loan assistance is what’s known as a Stafford loan; they fall into two categories — subsidized and unsubsidized. Dependent freshmen can borrow up to $2,625; sophomores can borrow $3,500; and third and fourth-year undergraduates can borrow up to $5,500. If their parents have been turned down for a PLUS loan or if they are independent, they automatically qualify for an additional $4,000 per year their first two years and an extra $5,000 the final two years. You have 10 years to pay back the loan; if you have more than one loan, you can consolidate them and get up to 25 years for repayment, says Texas-based certified college planning specialist, Alisa LeSueur.

Subsidized Stafford loans are given to students who meet specific financial need guidelines; for those loans, the federal government pays the interest that accrues while the student is in school. The first payment isn’t due until six months after graduation. The interest rate is variable and resets every year on July 1; it’s capped at 8.25 percent.

Unsubsidized Stafford loans are available regardless of financial need; any student can get them. The difference from the subsidized loan is the interest adds up while the student is in school. You can make interest-only payments during school, or defer it until after graduation and roll it into the loan amount.

There’s a 4 percent loan origination fee for the Stafford loan, but that’s typically just deducted from the loan proceeds, LeSueur says.

The other student loan available from the feds is the Perkins loan. It has the best terms, but is limited to students with exceptional financial need. Plus, it may be going away, says Robert Helgeson, director of student financial assistance at Gustavus Adolphus College in St. Peter, Minn., and president-elect of the Minnesota Association of Financial Aid Administrators.

“There was no new money put into it for this academic year by the federal government,” he says. “We normally got about $80,000 and had to match about a third of that. We got zero dollars from the government for 2005-2006.”

Parent loans
If you’re adding up the amount of money students can borrow and thinking it doesn’t come close to covering the cost of tuition at your student’s school, you’re probably right.

“The problem with the Stafford loan is the loan limits,” says Marvin Carmichael, director of student financial aid at Clemson University in Clemson, S.C. “It doesn’t even come close to addressing the $8,800 tuition at Clemson. It’s creating tremendous hardships for students. Congress has been unwilling to increase the loan limits to get back to the philosophy of making college affordable through a single source. It pushes families into different loan environments, some of which are more desirable than others. There’s a greater risk of default when families have multiple loans to repay.”

Many families turn to the PLUS loan to make up the difference. This loan is for parents, and covers the entire cost of college, minus any other financial aid the student receives.

It’s easy to apply for, with liberal credit requirements and no prepayment penalties, says Brian Greenberg, a New Jersey-based certified college financial planning specialist. The variable interest rate loan is capped at 9 percent; the current rate is 6.1 percent. Call the financial aid office at your student’s school for information on applying for a PLUS loan.

Borrowers can take up to 10 years to repay the loan, with the chance to consolidate loans for up to 30 years. Plus, payments can be deferred for three years in cases of economic hardship and if the borrower or the student dies or the borrower is permanently disabled, the loan is forgiven in full. Unlike student loans, however, PLUS loan borrowers need to start making payments immediately.

If you’re interested in the loan, but think you don’t have good enough credit to qualify, apply anyway. You might be pleasantly surprised, Helgeson says. The loan guidelines don’t look at debt-to-income ratios and “FICO scores are not mentioned in the regulations.” Besides, if you are turned down, your student automatically gets the extra $4,000 to $5,000 in unsubsidized Stafford loans.

Getting started
The starting point for applying for student loans, as well as any other federal aid, is the Free Application for Federal Student Aid, universally referred to by financial aid professionals as FAFSA. It will tell you what your family will be expected to contribute to the cost of the student’s education, based on your income, assets, and other obligations. It can be filled out online at the
Department of Education’s financial aid Web site. The form requires information from the previous year’s income tax return, so you’ll want to have that handy.

The biggest mistake that families make in regard to financial aid is thinking they’re not eligible and not applying, says Madelene Aponte, director of student financial services at Mercy College in New York.

“Many families think their incomes are too high, but they actually are eligible for aid,” she says. “If you have family income of $100,000 with four to five people in the household, you might qualify for a subsidized loan. If they’re borrowing for all four years, taking full-time class loads all four years, they’re looking at $17,000 in loans. You’re not paying any interest while you’re enrolled at least half time, that’s a substantial savings. If they go on to graduate school, that can tack on two to three years that can be deferred and interest that can be paid by federal government. If they don’t file a FAFSA, they can’t get that.”

LeSueur says filling out the FAFSA is especially important for families with more than one child in college. “The expected family contribution is split between children,” she says. “The gold mine for middle class families is multiple children. Twins have it made.”

Financial aid professionals point out that borrowing money for college, whether it’s from the federal government or from a home equity line, shouldn’t be viewed as a negative. While it’s a significant expense, it’s paving the way for future success.

“It’s an investment in themselves,” Helgeson says. “They can’t repossess your mind as far as I know.”