I realized after meeting with many, many families that the concept of student loans is a bit confusing. Well actually, unless you are a Financial Aid Administrator, understanding student loans can be very difficult. So, I thought it would be helpful to clarify a few things about student loans…First, there are two types of student loans: Federal and non-Federal (also known as private or alternative student loans).
Federal student loans are made available to students by the federal government. Schools have the option of receiving federal loans directly from the federal government (Direct Loans), or receiving federal loans from a lender (chosen by the borrower). In this case, the lenders are guaranteed the funds by the federal government (FFEL Loans). In essence, FFEL and Direct are identical loan programs with a different delivery method. RIT is a Direct Lending school; therefore, any federal student loan included in a financial aid award offer is processed by RIT. Borrowers do not have to find a lender for these loans.
These federal loans are made available to students without a co-signer or without a credit history. And, the interest rate is fixed at either 5.6% for subsidized loans (interest free while in college) or 6.8% for unsubsidized loans (interest accrues while in college). The federal student loans are by far more attractive than the non-federal loans. However, the government puts caps on the annual amount a student can borrow from the federal loan program. For example, a first year dependent student can borrow a maximum of $5,500 (no more than $3,500 subsidized) from the federal loan program. So, this is when the non-federal loans are considered.
Non-federal loans are offered by lenders to students, generally with a credit-worthy co-signer. The maximum amount that can be borrowed is normally the difference between the cost of attending college and the total financial aid awarded. Unlike the federal loans, these loans typically have a variable interest rate which is tied to either the prime or the LIBOR. In most cases, repayment can be deferred until after the student graduates. However, the interest will never be subsidized.
OK, are you still with me here?
Another twist to the student loan program is the Federal Parent Loan for Undergraduate Students (PLUS). Just like the federal student loan, there are two delivery options for the PLUS: Direct and FFEL. If a school is direct lending, all federal loans are processed by the school. There is not the option of getting the federal loan delivered by a lender. This also works in reverse for FFEL schools. As the name implies, this is a loan option for a parent of a dependent student. AND this option is recommended over the non-federal loans to meet any remaining educational expenses after financial aid has been applied. The PLUS Loan has a fixed 7.9% interest rate and repayment can be delayed until 6 months after the student graduates. There is a minimal required credit check for approval. However, if the loan is credit-denied the student has an option of an additional unsubsidized loan.
So, in summary there are primarily 3 loan options to meet educational expenses:
- Federal Student Loans (FFEL or Direct)
- Non-Federal Student Loans (private or alternative loans offered through lenders)
- Federal PLUS