Student Loans and Paying for College (Part 2)

Student Loans and Paying for College (Part 2)

Student Debt with Ball and Chain
A commentary on today’s student loan situation. Image courtesy of Cognoscenti.

Let’s explore a bit more of the technical details relating to the different grants and loans out there. I won’t touch on scholarships because they vary so widely depending on the offering organization.  Just as a quick refresher grants are need-based gift aid, scholarships are merit-based gift aid, and student loans are loans that must be paid back. We will first discuss the types of federal grants then move on to the different types of federal loans.

Key Points

  • The most common federal grants offered are Federal Pell Grants, FSEOG, and TEACH grants.
  • The most common federal loans offered include Perkins loans, direct unsubsidized loans, direct subsidized loans, and direct PLUS loans.
  • Pay close attention to the Master Promissory Note (MPN), which is essentially the terms and agreements when accepting a federal loan.
  • Federal loans possess many qualities that make them superior to federal loans.

Federal Pell Grants

Federal Pell grants are federal grants granted to undergraduate students who have not earned a bachelor’s or a professional degree who exhibit a degree of financial need.  It also should be noted that you cannot receive a Federal Pell Grant if you are incarcerated or subject to an involuntary civil commitment so before you commit that crime realize it could affect your future education prospects.  The yearly distribution amount differs on a number of factors including the level of your financial need, the cost of attendance, and whether you are a full-time or part-time student. The maximum award for the July 2014-June 2015 academic year was $5,730. This number can be adjusted slightly each year, but do not expect it to jump $1,000 in one year.  You can receive the Pell Grant for 12 semester (or approximately six years). You will receive the full amount you qualify for from your attending college.  As I nagged last lesson and will nag this lesson, you must fill out the Free Application for Federal Student Aid (FASFA) in order to receive a Federal Pell Grant.

Federal Supplemental Educational Opportunity Grant (FSEOG)

The FSEOG is a federal grant granted to undergraduate students who exhibit exceptional financial need such that a Federal Pell Grant is insufficient.  A FSEOG is only available to those student who have received a Pell Grant and exhibit the most financial need.  The FSEOG is not offered at all colleges therefore contact your prospective college’s financial aid office to find out if your college offers the FSEOG. The amount of aid offered through the FSEOG ranges from $100-$4,000 depending on your financial need, the other financial aid you receive, and the availability of funds at your college.

TEACH Grant

The TEACH Grant program is a specific federal grant program that grants up to $4,000 per year to students who are completing coursework related to a career in teaching.  There are some stipulations to accepting this aid such as if you accept you must teach: in a high-need field, at an elementary or secondary school that serves low-income families, and teach at least four academic years of the eight years after you cease schooling. What happens if you do not fulfill these requirements?  The grant is transformed into a direct unsubsidized loan for your breach of contract.  In addition to completing the FASFA if you are interested in the TEACH Grant program, be sure to contact your college’s  financial aid office and ask if they participate in the program. The other stipulations are explained in the TEACH Grant Agreement to Serve which acts as the contract for the grant.

Federal Perkins Loan

The Federal Perkins Loan is a low-interest student loan offered to undergraduate and graduate students who exhibit exceptional financial need.  Once again not all colleges participate in this program so you should contact your college’s financial aid office to see if it participates in this program. The amount you are allowed to borrow depends primarily on your financial need, the amount of aid you have received, and the availability of funds at your college. Unlike the Pell Grants, not everyone who qualifies for a Perkins loan will receive a loan.  As an undergraduate you are allowed to borrow up to $5,500 up to a total of $27,500.  As a graduate you are allowed to borrow up to $8,000 per year up to a total of $60,000.  Repayment begins nine months after you graduate, leave college, or drop below half-time status.  Before the nine months has passed interest does not accrue on the loan.  In addition the interest rate on these loans is fixed at 5% (currently).  To apply for this or any of the following loans you must complete and submit your FASFA (a big surprise I know).

 The Difference between Direct Subsidized and Unsubsidized Loans

Before I describe the direct subsidized and unsubsidized loans, it is worth that the biggest difference between the two is that with a direct subsidized loan the U.S. Department of education pays for (subsidizes) the interest payments that accrue when you are in college. If a student has an unsubsidized loan interest does accrue during your time in college.

Direct Subsidized Loans

Direct subsidized loans are student loans available to undergraduate (not graduate) students who exhibit financial need and are enrolled at least half-time. Once again check with your college’s financial aid office to see if the college participates in the Direct Loan Program.  The annual award is $3,500-$5,500 depending on grade level.  One of the most notable characteristics of the direct subsidized loan  is the interest owed (the rate is now at 4.66%) is paid by the federal government as long as you are in school as at least a half-time student and the grace period during the first six months after leaving school.  Also repayment of principal is not required until this grace period of six months has ended.

Direct Unsubsidized Loans

Direct unsubsidized loans are student loans available to both undergraduate and graduate students who are enrolled at least half-time and there is no requirement for financial need to acquire the loans.  The annual award can range from $5,500-$20,500 depending on grade level and dependency status.  The difference between the unsubsidized and subsidized loan is that that while you are in school you are responsible for paying the interest that accrues on the loan and during all grace periods.  You have the option to not pay the interest at that time but if you choose this option the interest will be capitalized (added to the principal amount of money you owe) thus increasing your interest payment later down the road.  The interest rates for direct unsubsidized loans are fixed and are currently 4.66% for an undergraduate student loan and 6.21%. Similar to the subsidized loans there is a six month grace period following the first six months after leaving school during which no principal payments are required.

Direct PLUS Loans

PLUS loans are federal student loans that graduate students and parents of dependent undergraduate students can use to pay college expenses without the need to show financial need.  Not all colleges participate in the federal loan program so be sure to contact your financial aid office. One of the most notable features of the PLUS loans is that the borrower must have a “good” credit history.  The maximum loan amount is the student’s cost of attendance (which is equal to total costs of attending minus financial aid received). Accrued interest must be paid while in school else it is capitalized to the principal of the loan.  If a parent takes out the loan for his (her) student, there is no grace period and repayment of principal must begin immediately, this is not the case for a graduate student who has a grace period following the first six months of leaving school. The current interest rate on direct PLUS loans is 7.21%. I really should stop beating this dead horse, but in order to apply for the direct PLUS loans you have to complete and submit the FASFA.

Federal vs. Private Loans

I’ve outlined a lot of different options and some may not seem very generous. You may be thinking “Is that the best that is out there?” Sadly I would say yes it is.  Many aspects of federal loans make them superior to loans offered by other institutions (private loans).  These include fixed interest rates instead of variable interest rates (interest rates that could change), the student is not required to repay any principal while in school, and the need for an established credit history or cosigner in order to secure the loan.

Before you agree to any federal loan be sure to read the Master Promissory Note (MPN) that serves as the loan contract and outlines the terms of the loan.

Definitions

  1. Grant: A need based form of gift aid which usually does not require repayment
  2. Student loan: A loan made to a student in college which may either by administered by the federal government or a private financial institution.
  3. Grace period: A period of time during which principal payment of a loan may be suspended.
  4. Interest capitalization: A type of loan stipulation in which unpaid interest is added to the principal balance of a loan.
  5. Private loans: Student loans offered by a private institution.
  6. Master Promissory Note (MPN): The contract outlining the terms and conditions for most federal student loans.

 

Further Reading

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