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Financial Aid: Loans

What is a financial aid loan?

A financial aid loan, commonly referred to as a student loan, is money given to a student to help the student pay for college or graduate school. Loans eventually have to be repaid by you or your child. By contrast, scholarships and grants do not. Nearly 45 percent of all undergraduate students finance part of their education with student loans. Not surprisingly, the percentage is even higher for those students pursuing advanced degrees—more than 50 percent of all graduate students and 75 percent of all professional students borrow money to attend school.

Are there different types of student loans?

Yes. The world of student loans can be complex because of the variety of loan types and lenders. The system of student loans involves the federal government, a network of money-lending institutions (banks),and other unique institutions such as guarantee agencies, student loan servicers, colleges, and state agencies.

Federal student loans

The federal government is the largest provider of student loans. Beginning July 1, 2010, all federal student loans must be obtained directly from the federal government under the William D. Ford Federal Direct Loan program. (Previously, a borrower could obtain a federal student loan either from the federal government under the Direct Loan program or from a private lender who participated in the Federal Family Education Loan (FFEL) program.) To apply for a federal student loan, borrowers must fill out the federal government’s financial aid form, the FAFSA (Free Application for Federal Student Aid).

Private student loans

Private lenders are the second-largest providers of student loans after the federal government. Private student loans are made by financial institutions directly to students without any involvement by the federal government. Private student loans differ from the institutional loans discussed above in that they are not guaranteed by the federal government: The bank gets stuck with the loan if you don’t repay it. However, private student loans are closely linked to federal student loans. For example, many graduate students (and some undergraduates) can use one application package to apply for both federal student loans and private student loans. To apply for private student loans, you will need to complete the appropriate lender application (if any) and perhaps the federal government’s FAFSA. Check with your lender.

State student loans

Every state has its own agency dedicated to higher education, and most states offer a variety of student loan programs. To apply for state student loans, you must complete the appropriate state application. Also, you’ll likely be required to submit the federal government’s FAFSA.

College student loans

Like the states, many schools have their own loan programs. As you might expect, college loan programs (if your college even offers one) vary regarding the interest rate, borrowing limits, repayment terms, and other provisions. To apply for college student loans, check with the particular college to learn what forms are required. Most colleges use the PROFILE form, a standard financial aid application put out by the College Scholarship Service. Others use an individualized institutional form. In addition, it is likely you will be required to submit the federal government’s FAFSA.

To continue reading about how to get the most out of your loans, click here and download our free e-book, Education Planning: Strategies to Help Plan for Your Child’s Future.

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