Student Loans

From www.finaid.org

Student Loans

An education loan is a form of financial aid that must be repaid, with interest. (Scholarships, on the other hand, do not have to be repaid.)

Education loans come in three major categories: student loans (e.g., Stafford and Perkins loans), parent loans (e.g., PLUS loans) and private student loans (also called alternative student loans). A fourth type of education loan, the consolidation loan, allows the borrower to lump all of their loans into one loan for simplified payment.

Federal law sets the maximum interest rates and fees that lenders may charge for federally-guaranteed loans. Nothing prevents a lender from charging lower fees. Many lenders offer a variety of student loan discounts to attract borrowers.

Few students can afford to pay for college without some form of education financing. Two-thirds (65.6%) of undergraduate students graduate with some debt, and the average federal student loan debt among graduating seniors is $19,202 (Stafford and Perkins Loans), according to the 2003-2004 National Postsecondary Student Aid Study (NPSAS). (The median is $17,120. One quarter of undergraduate students borrow $24,936 or more, and one tenth borrow $35,193 or more.) These figures increase by about 3% or approximately $550 a year. When one includes PLUS loans in the total, the average cumulative debt incurred is $21,814. (Approximately one in ten (10.7%) parents borrow PLUS loans for their children's college education, with a cumulative PLUS loan debt of $16,218.)

Graduate and professional students borrow even more, with the additional debt for a graduate degree ranging from $27,000 to $114,000. The following table shows the percentage borrowing and average amount of cumulative debt among graduating students according to degree program. It provides the amounts borrowed for just the graduate education and also the combined totals for undergraduate and graduate education.

	Graduate Education Debt		All Education Debt (Grad & Undergrad)
Graduate & Professional Degree Programs	Percent Borrowing	Cumulative Debt	Percent Borrowing	Cumulative Debt
Total	60.1%	$37,067	70.1%	$42,406
Master's Degree	58.4%	$26,895	69.3%	$32,858
Doctoral Degree	51.0%	$49,007	58.3%	$53,405
Professional Degree	86.5%	$82,688	88.4%	$93,134
MBA	53.0%	$35,525	63.6%	$41,687
MSW	76.5%	$27,136	81.0%	$37,029
PhD	40.0%	$36,917	46.8%	$41,540
EdD	53.4%	$49,050	65.7%	$47,725
Law (LLB or JD)	87.7%	$70,933	89.7%	$80,754
Medicine	95.0%	$113,661	95.0%	$125,819

Grants, scholarships, work-study and other forms of gift aid just do not cover the full cost of a college education. Many students find that they must supplement their savings with government and private loans. The Federal education loan programs offer lower interest rates and more flexible repayment plans than most consumer loans, making them an attractive way to finance your education. You can also deduct up to $2,500 in student loan interest even if you don't itemize deductions on your income tax return.

The interest rate on the Stafford Loan for new loans first disbursed after July 1, 2006 is a fixed rate of 6.8%. The same rate applies to the in-school, grace and repayment periods. The interest rate on new PLUS Loans first disbursed after July 1, 2006 is a fixed rate of 8.5%. The interest rates on existing variable rate Stafford and PLUS loans will continue to change annually on July 1, based on the last 91-day T-bill auction in May. The current interest rates on the Stafford Loan are 4.70% during the in-school and grace periods and 5.30% during the repayment period. The current interest rate on the PLUS Loan is 6.1%. These rates are expected to increase by 1.84% on July 1, 2006 to 6.54%, 7.14% and 7.94%, returning to historical average rates. FinAid recommends that students and parents who have not yet consolidated their variable rate loans do so before July 1 to lock in the current low rates. The era of historically low interest rates on student loans has ended, and families are extremely unlikely to see rates this low ever again. (Generally, it is best to consolidate your loans at least a month before the deadline, to give the lenders time to process the paperwork.)

Many student loan providers offer low cost government and private loans with consistently high quality servicing and flexible repayment terms. Citibank Student Loans is one of these lenders. FinAid maintains a list of education lenders, guarantee agencies, servicers and secondary markets who offer federal and private student loans, as well as advice on choosing a lender and tips on identifying the lenders that currently hold or service your loans.

Loan forgiveness programs (in which the borrower's loans are paid off in exchange for volunteer work or military service) offer an option for easy repayment. If you are having difficulty repaying your education loans, see Defaulting on Student Loans before you decide to skip a payment. It offers you some alternatives. Loan Cancellation and Discharge Forms can be found on the US Department of Education web site.

Finaid.org is a great source of information and tools for all kinds of loans, not just student loans or college loan consolidation.