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Need-Based Loans

Here is a run-down on Need-Based Loans:

Federal Perkins Loans: Formerly known as National Direct Student Loans (NDSL), these loans are made only to the student and carry the very low interest rate of 5%. Payment begins only after the student graduates, leaves school, or drops below half-time status. No interest is charged during the school years, and students have up to ten years to repay. Although the money comes from the government, these loans are administered through the school aid office.

The federal government gives the school a lump sum every year, but the Financial Aid Officer gets to decide which students receive these loans and how much they receive, based on need. Undergraduates can borrow up to $4,000 per year, with a cap of $20,000. Students must show a strong degree of need to be granted these loans.

Federal Stafford Loans: There are two types of Stafford loans. "Subsidized" Stafford Loans are available to students who have shown "need" as determined by their financial aid application. The federal government subsidizes the loan by not charging any interest until six months after the student graduates, leaves school, or falls below half-time attendance status.

The second type of Stafford loan is known as "unsubsidized" and is not based on need. Virtually all students who fill out a FAFSA are eligible for these loans. From the moment a student takes out an unsubsidized Stafford loan, however, he or she will be charged interest. Students are given the option of paying the interest while in school or deferring interest payments (which will continue to accrue) until repayment of principal begins.

In both cases the federal government guarantees the loan, which ensures a very low interest rate. (By and large, the in-school interest rate is 7.00%. The dependent student may be eligible to borrow up to $2,625 for the freshman year, up to $3,500 for the sophomore year, and up to $5,500 per year for the remaining undergraduate years. Graduate students can borrow up to $18,500 per year; however, only a maximum of $8,000 per year will be a subsidized Stafford.

One other wrinkle about Stafford loans: since 1994, some schools have administered their loans directly through the government's Direct Lending program, while others continue to use banks and other lenders. While the banks have lowered the costs of these loans through repayment discounts, the Direct Lending program does not offer these discounts.

Published Jan 16 2007, 09:29 PM by moneycoach
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