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Frequently Asked Questions About Student Loans

Authored By: Association of Private Sector Colleges and Universities, formerly the Career College Association

FAQ

I am interested in attending school and obtaining financial aid. How do I apply for Federal financial aid? 

You must complete a Free Application for Federal Student Aid (FAFSA) for each year you are in school, reporting your assets and income, as well as your parents' assets and income if you are considered a dependent student. See http://www.fafsa.ed.gov/ for the FAFSA application and what information is required to complete it.

For more information about Federal student financial aid, including grants, loans, and scholarships, as well as private sources of aid, see:

Once I have completed my FAFSA, how do I pay for college? 

There are many resources available for students to attend college. First, depending on financial need, Federal Pell Grants may available. The Federal Pell Grant Program provides need-based grants to low-income undergraduate students to promote access to postsecondary education. Students may use their grants at any one of approximately 5,400 participating postsecondary institutions. Grant amounts are dependent on: the student's expected family contribution (EFC); the cost of attendance (as determined by the institution); the student's enrollment status (full-time or part-time); and whether the student attends for a full academic year or less[1]. Unlike a loan, grants do not need to be paid back by the student.

Second, if students do not qualify for a Pell Grant, he or she is still entitled to borrow money from the United States Government. There are several types of loans available to students.

  • Direct Stafford Loans - These are loans which all students can access to pay for college. There are two types of Direct Stafford Loans: Subsidized and Unsubsidized. Subsidized loans do not accrue interest while the student is in school and the interest rate for these loans is currently 3.4%. Unsubsidized loans do accrue interest while the student is in school and the interest rate for these loans is currently 6.8%. For more information, please visit http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp
  • Perkins Loan - A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Federal Perkins Loans are made through a school's financial aid office. Your school is your lender, and the loan is made with government funds. You must repay this loan to your school. For more information, please visit http://studentaid.ed.gov/PORTALSWebApp/students/english/campusaid.jsp#03
  • PLUS Loans - Parents of dependent students may apply for a Direct PLUS Loan to help pay their child's education expenses as long as certain eligibility requirements are met. Graduate and professional students may apply for PLUS Loans for their own expenses.  For more information, please visit http://studentaid.ed.gov/PORTALSWebApp/students/english/parentloans.jsp

Can I cancel my loans when I am in school? 

Even after you have signed the promissory note, you may still cancel a PLUS, Perkins or Stafford Loan if you inform your school of your decision not to accept the loan payment within 14 days after the school notifies you of disbursement or the first day of the payment period, whichever is later. You may also refuse funds by returning the funds to the school.

When will I start paying back my loan? 

After you finish school or drop below half time status, you have a grace period of 6 months (for all Stafford loans) or 9 months (for Perkins loans) before you start repaying your loans.

  • Once your grace period is over, you will receive monthly payment notifications of the amount owed and where to send your payment.
  • For a PLUS loan, repayment begins 60 days after the loan is disbursed. Parents must repay the PLUS loans even while their children are attending school.
  • Each payment must be made in a timely fashion, and in full, unless an agreement is made with the lender, or you are in a period of deferment or forbearance.

How can I make my loan payments more affordable? 

You may select from a variety of repayment plans to assist in making your loan payments more affordable:

  • Standard Repayment Plan- borrowers pay a monthly fixed amount for up to 10 years.
  • Extended Repayment Plan- borrowers pay a monthly fixed amount up to 25 years.
  • Income Based Repayment Plans- the required monthly payment is capped at an amount that is intended to be affordable based on income and family size[1].
  • Graduated Repayment Plans- Monthly payments are initially small, comprised only of interest payments, and then gradually increase to standard payments of principal and interest.
  • Federal Consolidation Loan- At any time after loans are disbursed, you can consolidate all Federal Stafford, Perkins, and PLUS loans into one loan with a fixed interest rate and monthly payment schedule. The above repayment plans are available to borrowers with Federal consolidation loans. For more information, please visithttp://studentaid.ed.gov/PORTALSWebApp/students/english/consolidation.jsp?tab=repaying

What if I am unable to pay my loans? 

First you should notify your lender, and discuss options for repayment plans, consolidation, forbearance or deferment. You may also apply for any available deferments or forbearances you may be eligible. If you cease to pay your loans and go into default, you will lose the deferment or forbearance options. It is best to contact your lender to understand your legal rights and options should you have any issues with repayment.

What is a deferment, and how do I qualify? 

While a loan is being deferred, no payments need be made. Interest, however, may need to be paid depending on whether the loan is subsidized or unsubsidized. If interest is not paid on an unsubsidized loan, the interest will be added to the overall balance resulting in higher payments once they begin again.

  • You may apply for a deferment if you meet one of the following conditions:
  • Enrollment in school at least half time.
  • Study in a graduate fellowship program.
  • Unemployment- May defer payments for up to three years.
  • Active Duty Military Service during War or in the National Guard and has been called to Active Duty; and
  • Economic Hardship.

What if I do not qualify for a deferment but can still not pay my loans? 

You may qualify for a forbearance, where payments will be reduced or postponed for intervals of up to 12 months for up to 3 years. Interest will continue to accrue during the period of forbearance. Forbearance may be also granted in the certain situations. For more information, it is best to discuss all options with your loan servicer.

How do I apply for deferment or forbearance? 

To apply for deferments or forbearances for Stafford Loans, contact the guaranty agency or lender holding the loan. For Direct Stafford Loans, you may also contact the Direct Loan Servicing Center at 1-800-848-0979. For Federal Perkins Loans, contact the school that made the loan. The contact information for your guaranty agency or lender should be available on your monthly loan statement. If your loan is in default, you may not apply for deferment or forbearance unless you have rehabilitated the loan. For information on loan rehabilitation, contact your lender or the FSA ombudsman at http://www.ombudsman.ed.gov/rehab.html. After you apply for a deferment or forbearance, you must continue making loan payments until your request is approved, or you will be considered in default.

Can my student loans ever be cancelled? 

Under certain conditions, a student loan will be cancelled and all previous payments will be refunded. However, this is a rare occurrence. If the loan that is cancelled was in default, all negative implications from the default are removed from your credit reports, and you regain eligibility for Federal loans.

Conditions of loan cancellation:

  • Death of borrower;
  • Total and permanent disability based on a condition not existing at the time you applied for the loan;
  • Closed School - School closed while you were in attendance or within 90 days after you withdrew, and you did not complete the program through a teach-out or by transferring credits to another institution; or
  • False Certification -
    • The school signed your name on a loan promissory note without authorization and did not use the proceeds for your education; or
    • The school improperly certified your ability to benefit from the training because you did not have a GED or high school diploma or pass a properly administered Ability-to-Benefit test; or had a physical, mental or legal condition at the time of your enrollment that would bar employment in that field of study, and you could not find employment after finishing or withdrawing from the program.

Will my loans be discharged if I declare bankruptcy? 

Probably not, unless a bankruptcy court finds that repayment would cause an "undue hardship." It is extremely rare for student loans to be discharged in bankruptcy.

Can I get my loans discharged if I did not like my school or cannot get a job? 

No, a loan cannot be cancelled because the school misrepresented their educational, financial or administrative capability, including placement services, or because you did not complete the program, unless there is a valid reason.

What happens if I do not pay my loans? 

If you do not repay loans for 270 days if your loan is paid in monthly installments or 330 days if the loan is repayable in less frequent installments, your loans are considered in default.

What are the consequences of being in default?

The IRS may withhold your income tax refund and apply it to your loan; your employer may be required to deduct 10-15% of your disposable pay towards repayment of the loan; you are no longer entitled to deferment or forbearance options; you are liable for additional loan collection expenses during the period of default; you become ineligible for any additional Title IV aid; you may lose eligibility for other Federal loans, such as an FHA or a VA loan; and/or the default will negatively affects your credit rating for up to seven years.

How can I get out of default? 

Contact your guaranty agency or the U.S. Department of Education to work out an affordable repayment schedule, and begin to repay your loan, repay your loan in full, or you make 12 affordable consecutive monthly payments to the Department of Education Loan Rehabilitation Program and the Department will re-insure the loan. You will have nine years from that point to repay the loan in full.

How can I improve my credit rating if I am in default? 

Your credit report will be aided by bringing the loan out of default through repayment, loan rehabilitation, or consolidation. If you participate in the Department of Education's Loan Rehabilitation program, after 12 consecutive monthly payments the negative implications will be deleted from your credit report and you will regain eligibility for title IV funds.

Last Review and Update: Sep 13, 2011
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