What is a student loan?

There are many different types of education loans. Learn about federal and private education loans so that you can find the right loan to help pay for your education.

Federal education loans
Federal programs are the single largest source of education loans. The two primary programs are the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (FDLP). The loans available through these programs start with the same terms; however, in the FFELP, your bank, credit union, or school is the lender, and in the FDLP, the U.S. Department of Education is the lender.

Listed below are some of the more widely used federal education loans.

Federal Perkins Loans.
Federal Stafford Loans.
Federal Parent Loans for Undergraduate Students (PLUS).


Private education loans
Private education loans are also available from a variety of sources to provide supplemental funding when other financial aid does not cover costs. These loans are not sponsored by government agencies, and are offered by banks or other financial institutions. Federal and private loans are offered as a package from a single, convenient source.

Other private supplemental loans are available and in some cases are tailored to specific courses of study. Some examples include:

LAWLOANSSM.
MBA LOANSSM.
MEDLOANS.
Signature Student Loans


Types of federal student aid
PLUS LOANS (LOANS TO PARENTS)


What are PLUS Loans?
They’re loans your parents can take out to pay for your education expenses if you’re a dependent undergraduate student enrolled at least half time. Also, your parents must have no adverse credit history. As is true for Stafford Loans, there are FFEL PLUS Loans and Direct PLUS Loans. PLUS Loans are unsubsidized.

Q) Can my parents get both a Direct PLUS Loan and a FFEL PLUS Loan for me?
They can apply for either a Direct PLUS Loan or a FFEL PLUS Loan, but not for both for you during the same enrollment period. Your parents could, however, apply for a Direct PLUS Loan for you and a FFEL PLUS Loan for one of your siblings, for example.

Q) How do my parents apply?
For a Direct PLUS Loan, your parents must complete a Direct PLUS Loan application and promissory note, contained in a single form that you get from your school’s financial aid office.

For a FFEL PLUS Loan, your parents must complete and submit a PLUS Loan application, available from your school, lender, or yourstate guaranty agency.* After the school completes its portion of the application, it must be sent to a lender for evaluation.

Although it’s not a requirement, parents are encouraged to have their dependent children file a FAFSA, so their children can receive the maximum student aid they’re eligible for.

Q) Are there any borrowing requirements my parents have to meet?
Yes, generally they have to pass a credit check. If they don’t pass, they might still be able to receive a loan if someone, such as a relative or friend who can pass the credit check, agrees to endorse the loan and promises to repay it if your parents don’t. Your parents might also qualify for a loan if they don’t pass the credit check if they can demonstrate that extenuating circumstances exist. For them to borrow for you, you must meet the general eligibility requirements for federal student aid, and your parents must also meet some of these general requirements. For example, they must meet citizenship requirements or be eligible no citizens and may not be in default or owe a refund to any FSA program.

Q) Do they need to find a lender?
Not if they borrow under the Direct Loan Program, because their lender will be the U.S. Department of Education. Your school assists the federal government in administering the Direct Loan Program by distributing the loan application, processing the loan, and disbursing the loan funds.

Under the FFEL Program, your parents will need to find a participating lender. For help, they should contact your school or the guaranty agency* that serves your state. For your state agency’s address and telephone number, and for more information about borrowing, your parents can contact the Federal Student Aid Information Center at the address or toll-free number listed on the web page. A directory of guaranty agencies is also available at this U.S. Department of Education Web site: www.ed.gov/Programs/bastmp/SGA.htm

NOTE: Your school can refuse to certify your parents’ loan application, or can certify a loan for an amount less than they would otherwise be eligible for, if the school documents the reason for its action and explains the reason to your parents in writing. The school’s decision is final and cannot be appealed to the U.S. Department of Education.

Q) How much can my parents borrow?
The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive. For example, if your cost of attendance is $6,000 and you receive $4,000 in other financial aid, your parents could borrow up to—but no more than—$2,000.

Q) Do they get the money or do I?
Either the U.S. Department of Education (for a Direct PLUS Loan) or your parents’ lender (for a FFEL PLUS Loan) will send the loan funds to your school. Your school might require your parents to endorse a disbursement check and send it back to the school. In most cases, the loan will be disbursed in at least two installments, and no installment will be greater than half the loan amount. The funds will first be applied to your tuition, fees, room and board, and other school charges. If any loan funds remain, your parents will receive the amount as a check or in cash, unless they authorize the amount to be released to you or to be put into your school account. Any remaining loan funds must be used for your education expenses.

Q) Can my parents cancel the loan if they change their minds, even if they’ve signed the promissory note agreeing to the loan’s terms?
Yes. Your school must notify your parents in writing whenever it credits your account with PLUS Loan funds. This notification must be sent to your parents no earlier than 30 days before, and no later than 30 days after, the school credits your account. Your parents may cancel all or a portion of their loan if they inform your school within 14 days after the date your school sends this notice, or by the first day of the payment period, whichever is later. (Your school can tell you the first day of your payment period.) If your parents receive PLUS Loan funds directly by check, they may refuse the funds by not endorsing the check.

Q) What’s the interest rate on PLUS Loans?
The interest rate could change each year of repayment but does not exceed 9 percent. For July 1, 2002 to June 30, 2003, the interest rate for PLUS Loans in repayment was 4.86 percent. Interest rates are adjusted each year on July 1. Your parents will be notified of interest rate changes throughout the life of their loan. Interest is charged on the loan from the date the first disbursement is made until the loan is paid in full.

Congress changed the interest rate calculation for PLUS loans made on or after July 1, 1998. If your parents had PLUS loans first disbursed before that date, the interest rate might be different. For interest rates on a FFEL Stafford Loan, your parents should check with their lender. For interest rates on a Direct Stafford Loan, they should check with the Direct Loan Servicing Center (see web page).

Q) Other than interest, is there a charge to get a PLUS Loan?
Your parents will pay a fee of up to 4 percent of the loan, deducted proportionately each time a loan disbursement is made. For a FFEL PLUS Loan, a portion of this fee goes to the federal government, and a portion goes to the guaranty agency to help reduce the cost of the loans. For a Direct PLUS Loan, the entire fee goes to the government to help reduce the cost of the loans. Also, if your parents don’t make their loan payments when scheduled, your parents may be charged collection costs and late fees.

Q) When do my parents begin repaying a PLUS Loan?
Generally, repayment must begin within 60 days after the final loan disbursement for the period of enrollment for which you borrowed. There is no grace period for these loans. This means interest begins to accumulate at the time the first disbursement is made. Your parents must begin repaying both principal and interest while you’re in school.

Q) How do my parents pay back the loan?
For Direct PLUS Loans, your parents can choose the Standard, Extended, or Graduated Repayment Plan. The Income Contingent Repayment Plan is not an option for Direct PLUS borrowers. A Direct PLUS Loan can also be consolidated.

For FFEL PLUS Loans, parents can usually choose the Standard, Extended, Graduated, or Income Sensitive Plan. FFEL PLUS Loans can also be consolidated.

Q) Are there any tax credits available for paying back these loans?
Yes, there are tax incentives for certain higher education expenses, including a deduction for student loan interest for certain borrowers. This benefit applies to federal and nonfederal loans taken out to pay for postsecondary education costs. The maximum deduction is $2,500 a year. IRS Publication 970, Tax Benefits for Higher Education, explains these credits and other tax benefits. You can find out more by calling the IRS at 1-800-829-1040. TTY callers can call 1-800-829-4059.

Q) Is it ever possible to postpone repayment of a PLUS Loan?
Yes, under certain circumstances, your parents can receive a deferment or forbearance on their loan, as long as the loan isn’t in default.* Deferment and forbearance are explained, by clicking here. Generally, the conditions for eligibility and procedures for requesting a deferment or forbearance that apply to Stafford Loans also apply to PLUS Loans. However, since all PLUS Loans are unsubsidized, your parents will be charged interest during periods of deferment or forbearance. If they don’t pay the interest as it accrues, it will be capitalized.

Q) Can a PLUS Loan be discharged (canceled)?
Yes, under certain conditions. A discharge releases your parents from all obligation to repay the loan.

Your parents’ PLUS Loan can’t be canceled because you didn’t complete your program of study at your school (unless you couldn’t complete the program for a valid reason—because the school closed, for example), you didn’t like the school or the program of study, or you didn’t obtain employment after completing the program of study.

Student loan consolidation programs allow for a borrower's loans to be paid off and a new consolidated loan created.

These programs simply loan repayment by combining several types of Federal education loans into one new loan. The interest rate may be lower than on one or more of the underlying loans. Additionally, the monthly payment amount on a consolidated loan is usually lower and the amount of time to repay may be extended beyond what was available in the separate loan programs. These features generally result in more manageable debt and should make borrower's less likely to default on the loan.