Loan

Types Of Federal Student Loans

Students who look for financial aid during studies either go for federal student loans or private student loans. Federal student loans are offered by the US government, which are available directly through banks, student loan lenders, schools or from the Federal Family Education Loan program (FFELP). Federal loans are offered with very low interest rates, longer repayment periods and various kinds of repayment options with simpler credit requirements than private loans. In case of federal subsidized student loans, the interest is paid by the government to the financial institution while the student is enrolled as well as during a grace period. A federal loan may not be enough to cover all the expenses of the student and in that case, the student might have to take an additional private student loan. Note that the student will not get the full loan amount applied for and should only take the actual amount into account while preparing the budget.

There are different kinds of federal student loans from different institutions. Hence, it is advisable to take the guidance of parents or other financial aiding sources to decide on the type of federal direct student loan that suits the student the best.

Perkins loan option:

This loan is available for undergraduates and graduates in need at a fixed lower interest rate of five percent for a repayment period of ten years. The loan limits for undergraduates are $5,500 per year and $27,500 per lifetime. For graduate students the limit is $8,000 per year and $60,000 per lifetime (including undergraduate loans). The funds are handled directly by the school, making it easier to get the amount as soon as the student enrolls.

Stafford loan option:

This is the most common federal student loan and anyone can apply for it. It offers fixed interest rates and is available in the subsidized and unsubsidized form. When making use of the subsidized federal student loan, the government pays the interest while the student is enrolled. In the case of unsubsidized federal student loan, the student has to the pay the interest but can wait with payments until he completes his or her graduation. The interest rate for unsubsidized loans is currently at 6.8 %. Students applying for a Stafford Loan must complete the FAFSA (free application for federal student aid). Stafford Loans are available directly from the United States Department of Education through the Federal Direct Student Loan Program (FDSLP). It is important to apply much earlier than the closing date for the application to avoid any last minute trouble.

PLUS loan option:

Also known as parent loan for undergraduate students. It is given to the parents of undergraduate students who are dependent and have enrolled at least half-time. This loan option requires the applicant to be free from any adverse credit experiences like bankruptcy, default etc on their credit record. These loans are offered at a fixed interest rate that is higher than the Stafford loan rate and repayment starts while the student is enrolled.

For more information on student loans check out my post about Student Loan Consolidation.

How Does Student Loan Consolidation Work?

Nowadays, the cost of higher education is getting more and more expensive. Some families may not be able to afford further education for their son or daughter. Getting a student loan will help.

There are 2 broad categories of student loans available. Government student loans and private student loans

Government or federal student loans are funded and administered by the US Department Of Education. It is classified under Federal Student Loans Aid Program. They have very few requirements other than you are studying in a US college or university. International students may also apply though approval is on a case by case basis.

Every year, the student loan aid program disburse nearly 60 billion dollars so it is a good choice for get a student loan from the government. The interest rates on federal loans are pretty low.

Private student loans are funded and administered by banks and other financial institutions. These lenders provide student loans at a higher interest rate compared to federal student loans. Some common student loans available are from Citibank and Sallie Mae

You are allowed to apply for both private and federal student loans for your education needs although I would not recommend it.

For some students who have a few student loans to repay concurrently, it can be a financial drain on their family finances. That is where student loan consolidation comes in.

Student loan consolidation basically consolidates all your student loans into one loan so that it is easier to manage and make payments. When you are getting a student loan consolidation whether from the government or the private market, your existing student loans are paid for and erased by the student loan consolidation lender. The balances are transferred to the new student loan consolidation. Thus you start a new loan and only needs to make a single payment each month.

There are many advantages to using student loan consolidation. The interest rates will be lower since it takes the average interest rates of your previous student loans. Thus due to government legislation, the maximum interest rate cannot be higher than 8.25 percent.

It becomes a lot easier to manage a single student loan and payment are easier. The repayment options are quite flexible. For federal student loan consolidation, you can opt to start repaying after you have graduated from school. There are also several other options.

Another beneficial side-effect of student loan consolidation is that it can also improves your credit score. Since you are effectively clearing all your old student loans and taking a new one, your credit score will increase and is important if plan to take other types of loans in the future.

You can apply for a consolidated loan here.

Whatever your choices may be, remember the words of Benjamin Franklin: “Knowledge pays the best interest”.

For more information on student loans in general check out my post about Types Of Federal Student Loans.

From Simple to Compound Interest

Imagine you loan a bank the principal P = 10000 $ at an interest rate of i = 5 %. This is the amount of interest you would receive with simple interest, given the duration t of the loan:

t = 1 year
→ I = 10000 $ * 0.05 * 1 = 500 $

t = 2 years
→ I = 10000 $ * 0.05 * 2 = 1000 $

t = 3 years
→ I = 10000 $ * 0.05 * 3 = 1500 $

As you can see, the interest grows linearly with the duration of the loan. For each additional year, you get an additional 500 $, which is just 5 % of the principal 10000 $. In other words: each year the interest rate is applied to the principal. How could that be any different?

Consider this: At the end of the first year, you’ll receive an interest payment in the amount of 500 $. This means that your bank statement will now read 10000 $ + 500 $  = 10500 $. So why not apply the interest rate to this updated value? This would lead to an interest payment of 10500 $ * 0.05 = 525 $ for the second year instead of just 500 $.

Continuing this train of thought, at the end of the second year your bank statement would read 10000 $ + 500 $ + 525 $ = 11025 $. Again we would rather have the interest rate applied to this updated value instead of the unchanging principal. This would result in an interest payment of 11025 $ * 0.05 = 551.25 $ for the third year.

For comparison, here’s what the final pay out would be for the simple interest plan:

10000 $ + 500 $ + 500 $ + 500 $ = 11500 $

And this is what we would get with the “not simple” interest plan, where we apply the interest rate to the updated amounts instead of the principal:

10000 $ + 500 $ + 525 $ + 551.25 $ = 11576.25 $

The latter is called compound interest. It means that we include already paid interests in the calculation of next year’s interest, which leads to the amount received growing exponentially instead of linearly.

(This was an excerpt from “Business Math Basics – Practical and Simple”. You can get it here: http://www.amazon.com/Business-Math-Basics-Practical-Simple-ebook/dp/B00FXB8QSO/)

Bankruptcy And Students: Many Students Fail To Pay Off Their Debt

Young people in their early twenties, of which many are students, are becoming a fast-growing number of bankruptcy filers. Bankruptcy and students seems to be becoming a problem, and according to recent surveys, it is believed that teenagers younger than nineteen years of age own at least one credit card of their own. Also, it is reported that two thirds of undergraduate students have a minimum of one open credit card account, and it is believed that the average student graduates owes three to four thousand dollars in credit card debt along with other debts.

Managing Student Finances for the First Time May be a Reason for Defaulting

With more college students being marketed credit cards, it has even made some states enact legislation that limits solicitation to college students and recent bankruptcy reform procedures are also concerned with addressing the problem of bankruptcy and students. The reason behind bankruptcy and students becoming a big problem could lie in the fact that college students are learning to live alone and manage their own money for the first time, and thus find it hard to keep track of their credit card purchases.

According to experts, people tend to shop more with credit cards than when spending cash. When interest, late charges, increase in minimum payments are factored in, it makes for difficulty in managing finances and thus leads to bankruptcy and students becoming a growing malpractice.

Bankruptcy and students loans that are not repaid can often make a student feel as if he or she has just graduated from the school of hard knocks. Bankruptcy is not the escape route that students may be thinking of taking in order to avoid paying back government backed student loans as well as school loans backed by non-profit agencies. These loans are not discharged in a bankruptcy and have to be paid back after bankruptcy, though if a student can prove (very difficult actually) that the loan constitutes a considerable hardship, it can be got rid off without repayment.

Student loans, under normal circumstances, cannot be discharged under any chapter of the Bankruptcy Code. By using loopholes in government legislation, bankruptcy seems to offer an escape route to avoid paying off student loans, and the number of students that used bankruptcy to avoid paying off their debts increased dramatically over the recent past few years.

The bottom line is that it is the bankruptcy judge that has the final say, and for the lucky student, the odd bankruptcy judge may allow him or her to discharge the loan by filing for bankruptcy. Lenders too, cannot send their bills to a student who is in bankruptcy and need to wait till the case is decided. Often, it is better for the student to deal directly with the lender and find a mutually agreeable way of settling the debt, rather than going in for bankruptcy to avoid repayment.