Student Loans

Student Loans

By the time the average high school student is ready to head off to college his or her parents have likely saved sufficient funds to pay for about $12,000 of their child's college expenses.  Many parents will make the mistake of overestimating the amount of financial aid their student/child will qualify for.  In 2007, with the average cost of attending college for four years estimated at $80,128 at a public college and at $169,084 for a private college, it is clear that additional sources of funding will likely be needed. Coming out of college the average student will have accumulated about $17,000 in student loan debt.

Key Players in the World of Student Loan Financing:

  1. Lenders – up until the mid 1990's all student loans were essentially issued by banks and credit unions.  These lenders received subsidies from the federal government as incentive to provide loans to college students.  Then in 1994 the federal government began issuing these loans along side the banks.  The only loans not issued by lenders or the federal government are Perkins loans which are issued by colleges and universities. 
    • Federal Government – many federal student loans are made through the Department of Education. They issue the Stafford loans (though outside lenders participating in the Federal Family Education Loans (FFEL) program may issue Stafford loans as well).  
    • Colleges and Universities – they issue the Perkins loans.  The government provides each participating college with a lump sum for funding to its students.  These loans are meant for students with exceptional needs however each financial aid director can define what is exceptional. The Perkins loan is the most attractive of all forms of student financing because of its low rate of interest (at 5.00%), however it is also typically the smallest loan amount.
    • State Student Loan Agency – each state may have its own student loan financial aid program, in such cases the state agency is then your lender. The Alaska Student Loan Program is one example, another is the California Student Aid Commission which also offers the Cal Grant.
    • Private Lenders – specifically banks and credit unions.  They will collect and process payments on the student loan and will make their money on the interest paid on the loans.  However if the loan were to go into default due to lack of payment, the loan could go on to a guarantee agency or the Department of Education which are federal entities.


  1. Secondary Market Companies – essentially a conglomeration of finance companies.  This is where lenders will sell loans that are not in default if they do not want to collect the payments on the loans themselves.  Lenders make interest on the loans they originate but that income will be offset by the expense of monitoring and collecting payments on the loan. Therefore many lenders will sell their loans and collect a fee from a company which purchases them.  Examples of such secondary market cos. include Sallie Mae, the Student Loan Marketing Association.
  1. Loan Servicers – a company which is brought in by either your lender or secondary market co. (whomever holds your loan) to receive and process your loan payments and your other loan inquiries and correspondence.  Examples of such companies include Eduserve and the Student Loan Servicing Center.
  1. Guarantee Agencies – even though the student loan program is a federal program, it is primarily administered through state or private non-profit agencies referred to as guarantee agencies.  A guarantee agency is essentially an insurance company which pays off the holder of the loan if you don't make your payments.  The Department of Education provides the reinsurance funds.  The federal government has encouraged every state to establish a guarantee agency and many  have complied with the request.


Public Financial Aid: Where to Find It

There are three major kinds of aid.  Grants and scholarships are essentially gifts that do not require repayment, thus they are the preferred form of aid.  Next are government-subsidized loans which may offer a below market rate of interest or other financial benefits.  Lastly are work-study programs which are employment programs that provide for part-time employment while attending college so a student can earn money for college expenses. 

Federal and state government sources of aid include grants, loans and work-study related programs.  College-based aid comes mostly in the form of scholarships for students whom they have admitted, essentially as a form of tuition reduction.  There are some colleges that provide their own work-study programs or other kinds of financing options like shortened degree programs, cooperative education plans or loan forgiveness for those students on a particular type of career path.  Private sources of aid include employers sponsoring employee tuition plans and foundations which offer scholarship competitions.

Filling out the FAFSA (Free Application for Federal Student Aid) form annually is required for anyone who wants any type of financial aid; loans, grants, etc.  You will hear its name thrown around quite a bit by those in the student financial aid world so get used to hearing the name and as the name implies, it is free.  The information the student and their parents report on the FAFSA is analyzed by an automated government system which in turn produces an EFC (Expected Family Contribution).  However the FAFSA form assesses information that's pertinent to the current federal financial aid formulas only.  State-sponsored colleges and universities must also adhere to the federal guidelines. Private colleges and universities can have their own sources of aid which typically include wealthy donors, alumni and foundations.  This aid may be awarded based on the private colleges own criteria. 

Parent's take note:  401(K), IRA and funds set aside in any qualified retirement plan are not currently taken into account in the federal aid formula.  Home equity is also excluded from current federal financial aid guidelines.



Pell Grants – these grants are paid directly to the college (or through the college) and do not need to be repaid.  The grant will pay up to $4,050 annually ($2,354 on average) for eligible students.

Federal Supplemental Educational Opportunity Grants – these grants are paid directly to the college which in turn distributes the money to the student.  The student then returns the funds back to the college to cover tuition, housing, transportation costs or other expenses.  This money does not require repayment and is available up to $4,000.

Perkins Loans – one of the most attractive educational financing options for students because of its low interest rate of 5.00%, but note the maximum loan size can also be one of the smallest.  These loans are designated for students of exceptional need, this definition as noted previously, is left to the discretion of each financial aid director.  The funds for this loan are paid to the student through the college and the loan must be repaid after the student is in the workforce.   The annual maximum on this type of loan is $4,000 for undergrads and $6,000 for grad students.

Subsidized Stafford Loans* – this loan is also provided to students who are in need.  The loan must be repaid and the interest that accumulates while the student is in college is paid by the federal government and not the student.  The maximum loan amount varies per annum based upon the student's grade level.  Freshmen can receive up to $3,500, sophomores up to $4,500 and junior and seniors up to $5,500.

Unsubsidized Stafford Loans* – functions like the Stafford loan outlined previously with one critical difference, it is the student and not the federal government who pays the interest on the loan.  The interest that accumulates while the student is in college is typically capitalized or added to the loan balance.  So the student will ultimately pay the interest accrued on the loan throughout college and beyond.

*Note that Stafford Loans are part of the Federal Family Education Loans (FFEL AKA FELLS).  Because Stafford Loans are the largest component of the FFEL Loans, many will unknowingly use the terms interchangeably.

Work-Study Awards – the student will have an on-campus job waiting for you when you begin college.  Federal guidelines require that work-study employers pay at least the prevailing minimum wage.  The other advantage of the work study award is that the college will attempt to place the student in a job that pertains to their academic major. The money the student earns is just like that of any other job, the student's own to keep.

Plus Loans – PLUS is an acronym which stands for "Parent's Loans for Undergraduate Students."  If your Expected Family Contribution (EFC) is a bit more money than your parents anticipate being able to contribute, then PLUS is an opportunity for them to borrow some of the needed funds at below market rates. So this loan is actually taken out by the student's parents and not student.  The loan amount is based on actual college costs less any financial aid that the student may also receive.


Private Lenders: Banks and Credit Unions

Private lenders today account for about 20% of the student or educational loan market, they fund loans approximating $17.3 billion.  As recently as five years ago, private lenders accounted for only 12% of the total student loan market.  It is important to consider that as these loans may or may not be guaranteed or subsidized by the federal government, they could carry a higher rate of interest.  So be aware of this possibility when shopping loans and rates with private lenders.  Do your homework as always and compare their offerings to that available in the public financing arena.

Once you take out your first student loan, you will begin a relationship with a lender that will last for many years.  So it's essential to get all the information possible and select your lender carefully.  Not all lenders are the same and until recently all lenders were banks.  Today however there are educational associations as well as other organizations which offer student loans as well.  These non-bank lenders are a part of educational programs and may offer certain free programs and services that are very beneficial to students.  Don't neglect to inquire with a financial aid officer or administrator about these programs.

Get the facts and select a lender that's best suited to your needs.  Compare lenders carefully to see what they each have to offer before making your decision. Remember it's your financial future on the line as well as your future income. 


Use the following questions as a guideline when comparing lenders:

  1. What is the loan turnaround time from application to actually receiving the funds? This could vary widely amongst lenders. Pick one that meets your time table.
  1. Does your potential lender sell their student loans?  Note each time your loan is sold you could be dealing with a new set of policies however the actual loans terms cannot change.  But dealing with a new entity and having to comply with any policy changes could be confusing to students.  Note: if your lender sells their loans to only one source in the secondary student loan market and you have all your student loans with that one lender, then all your loans will ultimately be at the same place, making things significantly easier for you down the line.
  1. Will a student loan servicer be involved with your loan? These are the companies that will collect and process your payments, maintain your loan records and handle any questions that may come up.  If a servicer is involved, it is they and not your original lender, who will be your primary contact for matters surrounding your loan.
  1. Does your potential lender capitalize interest payments?  If so, this will allow you to postpone making interest payments until you begin to repay the loan. Interest payment would then be added to the principal balance on your loan.  This process will increase your loan balance beyond the original amount you borrowed and therefore will also increase your monthly payments at the time you begin repayment. A lender may elect to capitalize your interest every three, six or twelve months.  They may also opt to capitalize only one time when repayment begins.  This last option is most cost effective for you as a borrower so if possible select a lender that offers one time capitalization at the time of repayment.
  1. Ask about repayment assistance plans offered by the potential lender.  Loan consolidation and graduated repayment options are preferable.  Loan consolidation permits a student-borrower to combine all student loans into only one monthly payment.  This will reduce the amount of each payment but will ultimately increase the overall term of the loan.  Your interest rate could also increase in the process so ask the lender to outline precisely how their consolidation process would work.  Graduated payment plans allow your monthly payment to begin low and slowly increase over time, hopefully as your earnings grow and increase concurrently.
  1. Ask about the lenders policy for forbearance (AKA hardship). Select a lender that is flexible if you run into trouble making payments.  Some lenders will reduce or suspend your monthly payments in the event you encounter a real hardship (i.e. medical crisis, job loss).
  1. Choose a lender who is student-friendly and easy to contact for questions, guidance and overall assistance. Remember you are in the driver's seat as the customer so choose a lender who will work for you.


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Nancy Osborne, Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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