Charlene Crowell on Paying for College

As graduation day nears for high school seniors, students and their families are also weighing choices for college and financial aid. With college costs rising faster than most family incomes, schools are often compared to the level of financial aid each offers. How much assistance and how long it is available can be the final deciding factor for families.

Already, the nation’s student loan borrowers owe more than $1.2 trillion dollars. So before adding to that enormous debt, it’s best to know how to reduce the need for loans and equally important, the different loan options including their cost and repayment terms.

Pell Grants, based upon financial need, can provide financial aid up to 12 semesters or its equivalent. The level of need is determined by family finances, cost of attendance and whether enrollment is part-time or full-time. For the 2014 – 15 award year (July 1, 2014 to June 30, 2015), the maximum award will be $5,730. None of these funds require repayment. 

All student loans require repayment and can include applicable interest rates and fees. As a rule, federal loans generally offer better terms than private ones. But even among federal options, terms and availability vary. Borrowers typically incur penalties for skipping payments, or making either partial or late payments.

Direct loans, also known as Stafford Loans, are the most common type of federal student loan and are available in two forms: subsidized and unsubsidized. As of July 2012, Stafford Loans are limited to undergraduate students. Depending upon the cost of enrollment, and the level of financial need demonstrated, undergraduates can borrow from $5,500-$12,500 per year on both kinds of Stafford Loans. 

On a Subsidized Stafford Loans, the government determines financial need and then pays loan interest while the student is enrolled at least part-time. Borrowing an unsubsidized Stafford Loan means that interest on the loan begins to accrue while students are enrolled.

Repayment for both types of Stafford Loans begins six months following graduation or the end of enrollment – whichever comes first.

Another option may be a Perkins Loan. Designed to serve full- and part-time students with the most acute financial need, a Perkins Loan can be used to support undergraduate, graduate or professional programs. Although these loans are free from origination fees, they are not available at all schools.

Where available, Perkins Loan borrowers who are undergraduate students could receive up to $5,500 per year and up to a total of $27,500. As long as students are enrolled at least part-time, interest on these loans is subsidized by the government. Graduate and professional students for these loans may be eligible for up to $8,000 per year. Should a student use a Perkins Loan for both undergraduate and graduate studies, the loan cap is $60,000.

On the repayment side of Perkins Loans, full and part-time students have nine months from graduation or the date of leaving school before repayments are scheduled to begin – three months longer than the requirements for Stafford Loans.

One other federal loan, Parent PLUS, offers funds for education expenses not covered by other forms of financial aid.  To qualify for this loan, parents or guardians of enrolled students cannot have an “adverse credit history.” Credit reports showing recent foreclosures, tax lien or other credit delinquencies would reflect adverse credit.

In recent months, Parent PLUS has come under attack by education advocates, including the United Negro College Fund. Currently and in reaction to critics of the Parent PLUS loan, the Department of Education is considering adjustments to loan criteria and adverse impacts. 

A future commentary will be dedicated to additional information on private loan terms and characteristics. But what should be clear is that federal loans are generally cheaper and may offer more options for repayment than private loans. Additional information on federal loan options is available at: http://studentaid.ed.gov/. 

In today’s economy, even young professionals equipped with degrees and marketable skills can face a difficult and uncertain job search. Income-based repayment, loan forbearance and forgiveness can be options for federal loans.

Take the necessary time and effort to ensure that your student loan decisions are right for you.

Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at [email protected].