As of July 2010, all college loans in the United States are provided and managed by the United States Department of Education. This change was brought about by the Obama administration as a direct result of the abuses and widespread waste caused by previous educational loan programs. Many students may still have loans under the Federal Family Education Loan program, although most are now consolidating these into the government’s new program, the Federal Direct Student Loan Program. This program mandates that all new educational loans be sourced and provided directly by the federal government. This significant investment on the part of the American government in our education system makes it easier for low income families and individuals to attend college by providing low-cost college loans.
A student needs only to complete a FAFSA in order to apply for loans through the USDE. The FAFSA, or Free Application for Federal Student Aid, enables a student to apply for college loans, grants, scholarships and work study all on one form. Students may also use this form to apply for consolidation loans to group other loans under one FDSLP loan managed by the federal government. A separate but similar application can be made by parents who wish to pay for their children’s education, but cannot do so in cash. The funds available under the Federal Direct Student Loan Program are as follows:
Types of College Loans
Unsubsidized Direct Loans
Nearly every student will qualify for this type of college loan. Unsubsidized loans are those where the interest begins to accrue from the moment the loan is disbursed. Students would be wise to pay the interest on this type of loan as it accumulates, because the interest is compounded into the total amount of the loan in the same manner that credit cards use. As a result, students who pay the interest as it accumulates will realize a substantial savings over those that do not. However, the USDE understands that not everyone is able to do this while attending school, and therefore the interest rate on this loan is very low at only 6.8%. Maximum loan amounts range from $2000 to $6000, depending on what year of college the student is entering, and what other loans and aid they might be receiving. In general students will have 10 to 25 years to repay this type of loan.
Subsidized Direct Loans
Subsidized Direct college loans offer interest free payments while the student is still attending classes. Once the student finishes or discontinues school, interest will begin to accumulate at 4.5% for undergraduate students, and 6.8% for graduate or professional students. Subsidized loans are for students with exceptional financial need. Therefore, a student will be asked to provide personal and parental financial information in order to make a financial need determination. Maximum loan amounts for subsidized loans are $3500 for both dependent and independent students and $8500 for professional, doctoral, or graduate students.
Direct Consolidation Loans
If a student has multiple educational loans from different lenders or schools, they may be able to include them all in a direct consolidation loan. Rates are low when compared to other type of loans and vary according to how much and what types of loans are consolidated.
Direct Plus Loans
Parents that wish to pay for their child’s educational expenses may do so with this financial tool from the USDE. Application must be made by the parent. Direct Plus loans terms, rates, conditions, and amounts vary considerably, and are entirely dependent upon the applicant’s income and credit history.
Some students may wish to obtain loans by applying for personal loans with local banks or credit unions. However, rates and terms are nowhere near as favorable as they are under the Federal Direct Student Loan Program. Regardless of the source, educational loans should be repaid exactly as agreed. In the event that a student cannot repay their loan as planned, there are options available for reprieve, such as forbearances, temporary payment stays, and in rare cases, loan forgiveness. College loans forgiveness usually only applies to students who serve in teaching or public service jobs for a specific period of time after completing their studies, but may also apply in other rare circumstances.