College and the education loan borrowing process
I don’t think it’s any surprise to parents that loans from institutions are the largest form of student aid. Nor is it surprising that these loans entice students to pursue degrees unavailable without them. In fact, most kids, my son included can expect to receive a loan as part of a financial aid package in many cases. Recently, after attending a Financial Aid workshop I also learned that there are two other broad categories of loans: loans based on financial need and the loans not based on financial need. Huh?
After a 10 minute conversation with a college loan officer my “Huh?” question was answered as followed: “Need-based loans usually share three distinct features…”
- Low interest rates.
- No payments on principal are needed until the student graduates or leaves school.
- In-school interest subsidy may be used (which means the government pays the interest that accrues on the loan while the student is in school and during the six-month grace period after graduation resulting in substantial savings).
(Legislative Update: For Subsidized Stafford Loans for which the first disbursement is made on or after July 1, 2012, and before July 1, 2014, students will be responsible for the interest that accrues on the loan during the grace period. If a student does not pay the interest accrued, the interest will be capitalized to the principal amount of their loan when the grace period ends.)
I was then informed of the non-need-based loans which are used to help families that can’t afford to pay their expected contribution from savings and current income.
As mentioned earlier, many colleges will include one or more of these loans in a student’s award letter. The three features of the non-need-based loans are that they:
- Usually have higher interest rates
- Have no in-school interest subsidy
- May also require immediate repayment of principal.
As a member of the lower middle class my wife and I were told we “make too much for need-based loans”, so our interest has centered on 3 important loan opportunities for households in our bracket. The Unsubsidized Stafford Loan, which, if approved, will reduce the amount of interest payments. With this a promissory note must be filled out by your child and if the app. is approved the funds are then sent directly to your kid’s school of choice. The PLUS loan (a parent loan) allows for the total cost of education minus any aid (scholarships etc.) received. In most cases there is a quick turn around (approval) and here, too, the money is sent directly to the university/college.
Private or alternative loans would be my last option because they have higher interest rates, plus a credit check is required, lengthening the approval waiting period. Colleges and universities often provide a list of private loan sources and the College Board provides private loans for students.
The borrowing process, if needed, can be overwhelming to parents of college-aged students. It is nice to know that that are alternatives out there away from traditional loans. Now to take advantage of them!