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Federal Loan Basics

Along with grants, scholarships, and other community-based fundraising efforts, federal student loans are a very important part of the overall financial aid picture and can play a vital role in helping students pay for college and graduate school. Unlike grants and scholarships, federal student loans must be repaid--either directly to the college or to the U.S. department of education--usually with interest and sometimes with additional fees. Nevertheless, the federal student loan program make it possible for far more students to attend college and graduate school than otherwise would have the financial means. Let’s take a look at the currently available federal student loans:

 

Federal Perkins Loan

  • Low-interest (five percent) loan for both undergraduate and graduate students
  • Must demonstrate exceptional financial needs
  • Apply with your school’s financial aid office
  • Loan disbursements are paid to you directly or charged to your school fees
  • Amount received depends on timing of your application, funding level of your school, and financial need

 

Maximum Amount You Can Borrow:

  • $5,500 for each year of undergraduate study, and a total of $27,500 for the entire undergraduate degree program
  • $8,000 for each year of graduate studies, and a total of $60,000 (including any amounts borrowed as an undergrad)

 

Repayment

  • Loan must be repaid to your school
  • Skipped, late, or insufficient payments may be charged late fees
  • No other charges apply
  • If attending school at least half-time, repayment must begin by nine months after you complete your degree or leave school

 

 

Federal Direct Stafford Loan

  • Low-interest (3.4 percent to 6.8 percent, depending on the degree program) loans that can be applied to a four-year college or university, graduate school, community college, or trade, career, or technical school
  • Students borrow from the U.S. Department of Education
  • Schools must participate in the loan program in order for students to qualify
  • Two types of loans available: Direct Subsidized Loans, for students who demonstrate financial need; and Direct Unsubsidized Loans, which do not require students to show financial need

 

Maximum Amount You Can Borrow:

  • Dependent undergraduate students: $5,500 for the first year (not more than $3,500 in subsidized loans); $6,500 in the second year (not more than $4,500 in subsidized loans); $7,500 in the third year and beyond (not more than $5,500 in subsidized loans); $31,000 maximum (not more than $23,000 in subsidized loans)
  • Independent undergraduate students: $9,500 in the first year (not more than $3,500 in subsidized loans); $10,500 in the second year (not more than $4,500 in subsidized loans); $12,500 in the third year and beyond (not more than $5,500 in subsidized loans); $57,500 maximum (not more than $23,000 in subsidized loans)
  • Graduate and professional degree students: $20,500 in the first year and beyond (not more than $8,500 in subsidized loans); and $138,500 maximum (not more than $65,000 in subsidized loans), including any loan amounts received as an undergraduate

 

Repayment:

  • Must sign a Master Promissory Note (MPN) which legally binds you to repaying the Stafford Loan and all accrued interest and fees to the Department of Education
  • Must also pay a loan origination fee of 1.0 percent, paid incrementally with your loan payments
  • Repayment must begin six months after graduating, leaving school, or dropping below at least half-time attendance

 

 

Federal Direct PLUS Loans for Graduate and Professional Students

  • Fixed interest rate (7.9 percent) loans open to students pursuing graduate or professional degrees
  • Must prove no adverse credit history
  • Must go through your school’s financial aid office to determine maximum eligibility for Direct Stafford Loans (both subsidized and unsubsidized)
  • Must complete a Direct PLUS Loan Application and Master Promissory Note (MPN), in addition to the FAFSA, through your student financial aid office or through www.studentloans.gov (check with your school about whether to apply through the office or online)

 

Maximum Amount You Can Borrow:

  • Cost of attendance less any other financial assistance received (for example, if you cost of attendance as determined by your school is $80,000, and you receive $30,000 in other loans, grants, and/or scholarships, you can borrow up to $50,000 in Direct PLUS Loans)

 

Repayment

  • Repayment begins as soon as the loan is fully disbursed, with the first payment due within 60 days
  • Deferment of all payments is possible as long as you are enrolled in school at least half-time
  • If deferring payments, repayment must begin by six months after you graduate, leave school, or drop below half-time attendance (this six-month grace period applies only if your loan was disbursed on or after July 1, 2008)

 

 

Federal Direct PLUS Loans for Parents

  • Must meet general eligibility for federal student aid (determined through the FAFSA and other means) and must not be in default on any other federal student aid programs
  • Must be U.S. citizens or eligible noncitizens
  • Must demonstrate no adverse credit history
  • Borrower must be the biological or adoptive parent of the student (stepparents are eligible in some cases)
  • Fixed interest-rate (7.9 percent) loans for parents of dependent undergraduate students
  • Must complete a Direct PLUS Loan Application and Master Promissory Note (MPN) to apply, through the student’s financial aid office or through www.studentloans.gov (check with the student’s school about whether to apply through the office or online)

 

Maximum Amount You Can Borrow

  • Cost of attendance less any other financial assistance received (for example, if you cost of attendance as determined by the student’s school is $8,000, and you receive $3,000 in other loans, grants, and/or scholarships, you can borrow up to $5,000 in Direct PLUS Loans)

 

Repayment

  • Includes a fee of 4 percent of the loan amount, which is paid incrementally with each loan payment
  • Repayment begins as soon as the loan is fully disbursed, with the first payment due within 60 days
  • Deferment of all payments is possible as long as the student is enrolled in school at least half-time
  • If deferring payments, repayment must begin by six months after the student graduates, leaves school, or drops below half-time attendance (this six-month grace period applies only if your loan was disbursed on or after July 1, 2008)

 

 

Applying for Federal Loans

To apply for all federal aid, you must first submit a Free Application for Federal Student Aid. You can complete the FAFSA online. Once it has been accepted, you will be able to apply for federal student loans either directly through the U.S. Department of Education at www.studentloans.gov, or through your school’s financial aid office, depending on the type of loan. See the overview bulleted lists under each loan type above for information about where to apply, and also always check with your financial aid office about any update or additional guidelines your school may have in terms of application procedures.

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