Student Loan Primer

Student Loan Primer

Our parents always told us that hard work was the only road to success, but if they're so "successful" why are we stuck with all these student loans?
--Wake Forest University student, CollegeHumor.com

In the summer of 2007, the U.S. Department of Education sent letters to 721 colleges, universities, and trade schools where student lending practices seemed fishy. The government determined that the source of most of the student loans at each of these schools came from one lucky lender. At all these schools, a solitary lender held at least 80% of the institution's federal student loan volume. On some campuses, a single lender presided over a monopoly.

Because many lenders are eager to provide loans to college kids, you've got to wonder why any school would allow one competitor to dominate. Some schools explained that one lender was clearly the superior choice, so its students gravitated to it. But the discovery sure seemed to mock the notion of comparison shopping.

In its letter, the federal government didn't accuse the schools of lawbreaking, but the list did inflame the worst fears of student loan industry critics who have watched one school after another get caught with its hand in the cookie jar. Investigations have revealed that some colleges and universities -- no one knows the exact number -- have been selling out their student and parent borrowers for their own gain.

If you must borrow, there are proven ways to cut your costs. Just as important, you've got to know which loans are worth pursuing. Here's what you need to understand to protect yourself:

Use federal loans first. Federal loans are the superior choice for families. Unlike private loans, federal loans offer lower interest rates and fixed monthly payments. What's more, federal loans offer repayment plans based on a graduate's income, deferments for financial hardships, and cancellation provisions if the borrower dies or becomes totally and permanently disabled.

Here are the main federal loans:
Stafford loans. These loans come in two flavors -- subsidized and unsubsidized. The subsidized Stafford, reserved for needier students, is more attractive because the government pays the interest while the student remains in school. To get an idea of who qualifies, about two-thirds of students with subsidized loans have adjusted family incomes of less than $50,000, while a quarter of students have family incomes up to $100,000. Less than 10% of students with subsidized Staffords have family incomes that exceed $100,000. In contrast, the unsubsidized Stafford is available to students regardless of their parents' income.

Unfortunately, many families won't be able to borrow all that they need through a Stafford loan. The government has received a lot of flak for maintaining a low Stafford borrowing ceiling. Most freshmen and sophomores can only borrow up to $3,500 and $4,500, respectively, while juniors and seniors can obtain $5,500 each year.