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Student Loans — Introduction

Are student loans worth taking out?

If you have no other way of paying for college or graduate school, taking out a student loan is one of the best and most honorable investments you can make for your future or the future of your children. Student loans are a "good debt" to have. Reason: you are borrowing money to invest in yourself and your (or your children's) future.

Is there a tax deduction?

Yup. A few years ago, you could deduct interest payments on the first 60 months of your student loan interest payments, up to a limit of $2,500, if you meet certain income qualifications. As of 2005, you will be able to deduct student loan interest up to any amount, regardless of how long you have been making interest payments, but you are subject to some income qualifications.

Do student loans come in many flavors?

There are several kinds of student loans. The oldest and best known is a Perkins loan. With Perkins loans, the U.S. government lends a certain amount of money to a college, which in turn lends it to students who need it. The Perkins loan carries a very low interest rate: 5 percent. Then again, it is one of the smallest loans out there: It has a ceiling of $3,000 per year, and no more than $15,000 over the course of your undergraduate study. If you are a graduate or a postgraduate student, you can borrow up to $5,000 per year, with a cap of $30,000.

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How long do I have to pay off my Perkins loan?

You have to begin repaying your Perkins loan nine months after you leave college, and you have up to ten years after that to pay off the full amount. Colleges often sell these loans, with their outstanding balances, to banks. This doesn't mean much to you, except that you will now be making payments to the bank rather than the college.

The Perkins loan doesn't quite given me the amount of money I need. What other options are there?

You may apply for a Stafford loan. A Stafford -- sometimes known as a Federal Family Education Loan (FFEL), a Ford loan, or a direct loan, depending on whether the lender is the college, a bank, or the federal government -- exists to make up the difference between the cost of college tuition and the expected family contribution, or EFC. The EFC is the amount the college believes a family should be able to pay after it has crunched the family's financials. Each student either at a two-year or a four-year institution can borrow up to $2,625 at an interest rate that by law can go no higher than 8.25 percent and which usually hovers at around 7.5 percent. The maximum total a dependent student (one who has access to parental support) can borrow is $23,000. You begin paying back the loan six months after you leave college. You have ten years to pay back the entire amount, though often the payback period is negotiable.

To apply for a Stafford loan, you must fill out a form. If the lender is a bank rather than a college, you must submit a letter from your college stating your eligibility. Lastly, be aware that there are two forms of Stafford loans: subsidized and unsubsidized.

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What is the difference between a subsidized and an unsubsidized Stafford loan?

If you get a subsidized Stafford loan, you won't be charged any interest until you begin paying back the loan (six months after you leave college). Until then, the US government assumes responsibility for your interest payments. With an unsubsidized Stafford, you (not the government) are responsible for the interest payments while you are at college and for the first six months after you leave. This doesn't mean that you have to pay interest every month; you can defer the interest payments and add them to the principal to be repaid after you have graduated.

What is a PLUS loan?

PLUS, or Parents' Loans for Undergraduate Students, is a loan with a comparatively low interest rate (by law, no greater than 9%) that will cover the difference between the cost of attendance (COA), and the amount of financial aid that you will be receiving. The cost of attendance is the total amount it costs a student to go to school. For full-time students this includes tuition, fees, room and board, allowances for books, supplies, transportation, costs related to dependent care of disability, and miscellaneous expenses. The yearly limit on a PLUS loan is equal to the cost of attendance minus any other financial aid you receive. For example, if your COA is $6,000 and you receive $4,000 in financial aid, your parents could borrow up to but no more than $2,000.

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I want to apply for a student loan, but my credit rating is pretty bad. Will I be denied the loan?

Probably not. If you or your family have had a history of delinquent bill paying or even a bankruptcy, it won't count against you. The only thing that could be a problem is if you have ever defaulted on a previous student loan. The only qualifications for a Stafford or a Perkins loan are:

  • need
  • a high school diploma or GED
  • enrollment or acceptance for enrollment as a regular student working toward a degree or certificate in an eligible program
  • U.S. citizen or eligible Alien status
  • a valid Social Security number

Note: If you are a veteran, the child of a veteran who died or was permanently disabled in battle, or a nursing student, a pharmacy student, or a Native American, special grants and dispensations are available to you. Check your college or university.

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Who precisely grants and/or manages the loan I finally get -- the college/university, the US Government (Dept. of Education) or a bank?

Tthis depends on the type of loan you take out. If you take out a Perkins loan, your loan will be managed by the school that lends you the money or by an institution that the school assigns to service the loan. If you take out a direct loan, the funds for your loan are lent to you directly by the U.S. government and it will be managed by the Direct Loan Servicing Center at the U.S. Department of Education. If you borrow a FFEL, the funds for your loan are lent to you from a bank, credit union, or other lender that participates in the FFEL program and will be managed by your lender or its servicing agent. Your lender or the Direct Loan Servicing Center will provide you with additional information about your loan.

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  • Collections Guide to Defaulted Student Loans -- part of the U.S. Department of Education's Federal Student Aid programs which is the largest source of student aid in America, providing nearly 70% of all student aid.
  • Federal Student Aid, an office of the U.S. Department of Education, that plays a central and essential role in America's post-secondary education community. Lots of good info here.
  • National Student Loan Data System (NSLDS) is the U.S. Department of Education's (ED's) central database for student aid.
  • The Project on Student Debt -- aims to increase public understanding of student debt and the implications for our families, economy, and society
  • Mortgage Community -- A Forum with discussion on topics such as: First Time Home Buyers; Mortgage Companies; Deeds; Property Transfer and Estate Planning; Property Appraisal; more.
  • Insurance Community Forum -- Topics incude: Claims and Payments Issues; Managing Insurance Policy; Insurance Fraud; a Insurance Agent Forum is also active.

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