Choosing Student or Parent Loans

Quick Reference Guide on
Choosing a Student or Parent Loan

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1op 1en Student Loan 1|ps
uebL ls ofLen unavoldable when lL comes Lo paylng for college,
wlLh Lwo-Lhlrds of 8achelor's degree reclplenLs graduaLlng wlLh
sLudenL loans. SmarLer borrowlng, however, can help you
reduce your debL burden.
1. I||e the Iree App||cat|on for Iedera| Student A|d (IAISA).
1he lAlSA ls a prerequlslLe for federal sLudenL and parenL
loans. 1he unsubsldlzed SLafford and LuS loans do noL
depend on flnanclal need, so you do noL need Lo be poor Lo
quallfy for low-cosL federal educaLlon loans. ?ou mlghL also
quallfy for governmenL granLs and oLher forms of flnanclal
ald. ?ou can flle Lhe lAlSA onllne aL www.fafsa.ed.gov.
2. M|n|m|ze debt. Llve llke a sLudenL whlle you are ln school
so you don'L have Lo llve llke a sLudenL afLer you graduaLe.
uo noL LreaL loan llmlLs as LargeLs. SLudenLs who borrow
more Lhan $10,000 a year wlll graduaLe wlLh more debL
Lhan 90 of Lhelr peers. Lven $7,300 for each year ln
school may be Loo much (73
Lh
percenLlle). Lvery dollar you
borrow wlll cosL you abouL Lwo dollars by Lhe Llme you've
repald Lhe debL. So before you spend sLudenL loan money
on anyLhlng, ask yourself lf you'd sLlll buy lL aL Lwlce Lhe
prlce. 8orrow only whaL you really need Lo pay for school.
3. |an ahead. ?our LoLal educaLlon debL aL graduaLlon should
be less Lhan your expecLed sLarLlng salary, and ldeally less
Lhan half your sLarLlng salary. CLherwlse you wlll have
dlfflculLy repaylng your sLudenL loans and you may be
forced Lo abandon your dreams by Lhe need Lo repay your
debL. LsLlmaLe your debL aL graduaLlon by mulLlplylng your
flrsL year's debL by Lhe number of years ln your degree
program. lf you borrow more Lhan your expecLed sLarLlng
salary, you wlll need Lo use a longer Lerm repaymenL plan
Lo afford your monLhly loan paymenLs. 1hls means you wlll
sLlll be repaylng your own sLudenL loans by Lhe Llme your
chlldren enroll ln college. LxLendlng Lhe repaymenL Lerm
wlll double or even Lrlple Lhe LoLal lnLeresL pald over Lhe
llfe of Lhe loan. lf you borrow more Lhan Lwlce your
expecLed sLarLlng salary, you wlll be aL hlgh rlsk of defaulL.
4. 8orrow federa| f|rst. lederal sLudenL loans are cheaper,
more avallable and have beLLer repaymenL Lerms Lhan
prlvaLe sLudenL loans. 1he lnLeresL raLes on federal
educaLlon loans are flxed, whlle Lhe lnLeresL raLes on mosL
prlvaLe sLudenL loans are varlable and wlll probably
lncrease over Lhe llfe of Lhe loan. lederal sLudenL loans are
ellglble for lncome-based repaymenL (www.flnald.org/lbr)
and publlc servlce loan forglveness (www.flnald.org/pslf),
whlle prlvaLe sLudenL loans are noL. CeL federal sLudenL
and parenL loans Lhrough your college's flnanclal ald offlce.

key Student Loan kesources
I|nA|d's Student Loans Sect|on and Student Loan Ca|cu|ators
www.flnald.org/loans
www.flnald.org/loans/calculaLors.phLml
Student Loan Check||st
www.flnald.org/sLudenLloancheckllsL
Student Loan 8orrower Ass|stance ro[ect
www.sLudenLloanborrowerasslsLance.org
ro[ect on Student Debt
www.pro[ecLonsLudenLdebL.org
Iedera| Student Loans
www.sLudenLloans.gov
Iedera| D|rect Loans
www.dlrecL.ed.gov
D|rect Loan Serv|c|ng
www.dlssonllne.com
1-800-848-0979 or 1-313-738-6634 or fax 1-800-848-0984
1-800-848-0983 1uu
Iedera| D|rect Conso||dat|on Loan
www.loanconsolldaLlon.ed.gov
1-800-337-7392, 1uu 1-800-337-7393 or fax 1-800-337-7396
r|vate Student Loans
www.flnald.org/prlvaLesLudenLloans
r|vate Loan Compar|son S|tes
www.flnald.org/loancomparlson
r|vate Conso||dat|on Loans
www.flnald.org/prlvaLeconsolldaLlon
Iedera| Student A|d Cmbudsman
1he lSA Cmbudsman medlaLes dlspuLes and helps resolve
problems concernlng federal sLudenL loans.
www.ombudsman.ed.gov
1-877-337-2373 or fax 1-202-273-0349
fsaombudsmanofflce[ed.gov
r|vate Student Loan Cmbudsman
1he SL Cmbudsman medlaLes dlspuLes and helps resolve
problems concernlng prlvaLe sLudenL loans.
help.consumerflnance.gov/app/sLudenLloan/ask
1-833-411-Cl8 (2372) or fax 1-833-237-2392
Iedera| Student A|d Informat|on Center
1-800-4-lLu-Alu (1-800-433-3243) or 1-319-337-3663
1-800-730-8913 1uu
sLudenLald[ed.gov
Iorgot our Lender? Ask your college's flnanclal ald
admlnlsLraLor or vlslL www.flnald.org/losLlender
Nat|ona| Student Loan Data System (NSLDS)
www.nslds.ed.gov



3. Ask about tu|t|on |nsta||ment p|ans. MosL colleges offer
LulLlon lnsLallmenL plans whlch leL you spread ouL Lhe
college blll over 9 or 12 equal monLhly lnsLallmenLs. 1hese
plans Lyplcally charge an up-fronL fee of less Lhan $100 and
do noL charge lnLeresL. 1hls can be a cheaper alLernaLlve Lo
borrowlng Lhe money Lhrough educaLlon loans.
6. ay the |nterest on unsubs|d|zed |oans dur|ng the |n-
schoo| and grace per|ods Lo prevenL Lhe loan balance from
growlng larger. MosL sLudenL loans allow borrowers Lo
defer repaylng Lhe loans durlng Lhe ln-school and grace
perlods. lf you don'L pay Lhe lnLeresL aL lL accrues, however,
Lhe lnLeresL ls caplLallzed (added Lo Lhe loan balance). 1hls
ls negaLlve amorLlzaLlon (www.flnald.org/negamorL) and
can lncrease Lhe loan balance by 13 Lo 20 by Lhe Llme
you enLer repaymenL. lederal and prlvaLe sLudenL loans do
noL have prepaymenL penalLles (www.flnald.org/prepay),
so noLhlng prevenLs you from paylng Lhe lnLeresL durlng
Lhe ln-school perlod. Lven lf you can'L afford Lo pay Lhe full
amounL of lnLeresL, Lry Lo pay someLhlng, as Lhls wlll save
you money ln Lhe long Lerm. Some lenders wlll even glve
you a lower lnLeresL raLe or oLher dlscounLs lf you agree ln
advance Lo make paymenLs durlng Lhe ln-school perlod.
7. App|y for pr|vate student |oans w|th a cred|tworthy
cos|gner. noL only wlll Lhls lncrease your chances of geLLlng
Lhe loan, buL lL usually resulLs ln a lower lnLeresL raLe slnce
ellglblllLy, lnLeresL raLes and fees are based on Lhe hlgher of
Lhe Lwo credlL scores. 8uL beware, a coslgner ls a co-
borrower, equally obllgaLed Lo repay Lhe debL. lf Lhe
prlmary borrower ls dellnquenL or defaulLs on Lhe loan, Lhe
laLe paymenLs and defaulL wlll be reporLed on Lhe
coslgner's credlL hlsLory Loo.
8. Get organ|zed. CreaLe a sLudenL loan checkllsL LhaL llsLs all
of your sLudenL loans. A blank sLudenL loan checkllsL ls
avallable aL www.flnald.org/sLudenLloancheckllsL. uL all of
your paperwork for each loan ln lLs own flle folder labeled
wlLh Lhe lender name, daLe borrowed, orlglnal loan balance
and loan ld. uL a noLe on your calendar aL leasL a week
before your flrsL paymenL ls due. 1ell Lhe lender abouL your
new address whenever you move.
9. S|gn up for auto-deb|t w|th e|ectron|c b||||ng, where Lhe
monLhly loan paymenLs are auLomaLlcally deblLed from
your bank accounL. 8orrowers wlLh auLo-deblL are much
less llkely Lo mlss a paymenL. Many lenders offer dlscounLs
for borrowers who seL up auLo-deblL wlLh elecLronlc bllllng.
lederal educaLlon loans offer a 0.23 lnLeresL raLe
reducLlon whlle many prlvaLe sLudenL loans ofLen offer a
0.23 or 0.30 lnLeresL raLe reducLlon for auLo-deblL.
10. C|a|m the student |oan |nterest deduct|on on your federa|
|ncome tax return. up Lo $2,300 ln sLudenL loan lnLeresL on
federal and prlvaLe sLudenL loans can be deducLed on your
federal lncome Lax reLurn each year. 1hls deducLlon ls
Laken as an above-Lhe-llne excluslon from lncome, leLLlng
you clalm Lhe deducLlon even lf you don'L lLemlze. ?ou can
Lake Lhe deducLlon only lf you are requlred Lo make
paymenLs and you can'L be clalmed as an exempLlon on
someone else's reLurn. (www.flnald.org/lnLeresLdeducLlon)
Cr|ter|a for Choos|ng a Student Loan
When evaluaLlng an educaLlon loan, mosL famllles focus flrsL on
cash flow conslderaLlons:
!"# %&'( %")*+ ',) +"& -*. ." /,+ 0"1 '"22*-* '"3.3
,)45"1 2676)- *8/*)3*39
!"# %&'( ,1* .(* %").(2+ /,+%*).39
:(*) 4" .(* /,+%*).3 3.,1. ,)4 #(*) 4" .(*+ *)49
:(,. 63 .(* .".,2 '"3. "0 .(* 2",) ;.(* .".,2 /,+%*).3 "7*1
.(* 260* "0 .(* 2",)<9
:(" 63 1*3/")36=2* 0"1 /,+6)- =,'> .(* 2",)9
1he cosL of Lhe loan depends on several facLors. Cf Lhese, Lhe
lnLeresL raLe has Lhe blggesL lmpacL on loan cosLs. Cenerally,
famllles should prefer loans wlLh Lhe lowesL afLer-Lax lnLeresL
raLe, such as federal educaLlon loans.
Interest rate. ls lL varlable or flxed? lf lL ls varlable, how
frequenLly does lL change and ls Lhere a cap? 8eware: noL
everybody quallfles for Lhe besL adverLlsed raLe.
Iees. CrlglnaLlon, dlsbursemenL and guaranLee/defaulL
fees are effecLlvely a form of up-fronL lnLeresL, llke polnLs
on a morLgage. A good rule of Lhumb ls LhaL every 4 ln
fees ls Lhe equlvalenL of abouL a 1 lncrease ln Lhe lnLeresL
raLe on a 10-year loan and abouL a 0.3 lncrease ln Lhe
lnLeresL raLe on a 30-year loan (e.g., 7.9 lnLeresL raLe + 4
fees equlvalenL of 8.84 lnLeresL raLe and no fees wlLh a
10-year repaymenL Lerm, 8.33 lnLeresL raLe and no fees
wlLh a 30-year Lerm). Some prlvaLe sLudenL loans charge a
second fee when Lhe loan enLers repaymenL. MosL loans
also charge laLe fees (Lyplcally up Lo 6 of Lhe laLe
paymenL) and collecLlon charges (for loans ln defaulL).
Subs|d|zed |oans. 1he governmenL pays Lhe lnLeresL on
subsldlzed federal loans, such as Lhe lederal erklns loan
and Lhe lederal subsldlzed SLafford loan, durlng Lhe ln-
school, grace and oLher ellglble defermenL perlods.
LllglblllLy for subsldlzed loans ls based on flnanclal need.
unsubsldlzed loans are noL based on flnanclal need and
may be used Lo pay for Lhe famlly's share of college cosLs.



Interest cap|ta||zat|on. 8orrowers can defer repaylng
unsubsldlzed loans and prlvaLe sLudenL loans durlng Lhe ln-
school, grace and oLher defermenL perlods by caplLallzlng
Lhe lnLeresL (addlng lL Lo Lhe loan balance). 1he frequency
wlLh whlch caplLallzaLlon occurs can affecL Lhe cosL.
MonLhly caplLallzaLlon ls Lhe mosL expenslve, lncreaslng Lhe
LoLal lnLeresL by as much as 10. Cne-Llme caplLallzaLlon
when Lhe loan enLers repaymenL ls Lhe leasL expenslve.
Cap|ta||zat|on
Irequency
Cap|ta||zed
Interest
1ota| Interest
Compar|son
Month|y $4,978 +10.3
uarter|y $4,947 +9.8
Annua||y $4,833 +7.3
At kepayment $4,303 +0.0
$27,000 unsubsldlzed SLafford loan ($3,300, $6,300, $7,300, $7,300)
over 4 years wlLh 2 dlsbursemenLs per year, 6.8 lnLeresL.

D|scounts. Some lenders offer lnLeresL raLe reducLlons or
one-Llme rebaLes LhaL can reduce Lhe cosL of Lhe loan.
Some dlscounLs requlre Lhe borrower Lo agree Lo have
monLhly paymenLs auLomaLlcally deblLed from Lhe
borrower's bank accounL and Lo recelve monLhly
sLaLemenLs by emall. CLher dlscounLs requlre Lhe borrower
Lo make all paymenLs on Llme. Some dlscounLs are
provlded when Lhe sLudenL graduaLes. Some lenders
provlde sllghLly lower lnLeresL raLes for borrowers who
make paymenLs durlng Lhe ln-school perlod, choose a
shorLer repaymenL Lerm or have a coslgner.
1ax deduct|on. 1he sLudenL loan lnLeresL deducLlon allows
borrowers of quallfled educaLlon loans, such as federal and
mosL prlvaLe sLudenL loans, Lo deducL up Lo $2,300 a year
ln sLudenL loan lnLeresL on Lhelr federal lncome Lax reLurns.
CLher crlLerla focus on ellglblllLy, flexlblllLy and convenlence:
Who |s the borrower? Some loans are borrowed by Lhe
sLudenL (erklns, SLafford, Crad LuS, rlvaLe) and oLhers
are borrowed by Lhe parenL (arenL LuS, rlvaLe) or
someone else (rlvaLe). Some prlvaLe sLudenL loans requlre
a coslgner. A coslgner ls a co-borrower, equally responslble
for repaylng Lhe loan. lf Lhe paymenLs are laLe or Lhe loan
goes lnLo defaulL, Lhe loan's sLaLus wlll be reporLed on Lhe
credlL hlsLory of boLh Lhe borrower ,)4 coslgner. Some
loans LhaL requlre a coslgner offer a coslgner release
opLlon, where Lhe coslgner can be removed from Lhe loan
afLer Lhe borrower makes Lhe flrsL 12, 24, 36 or 48
paymenLs on-Llme, sub[ecL Lo credlL crlLerla.
8orrower e||g|b|||ty. ls Lhe loan ellglblllLy based on
saLlsfylng credlL underwrlLlng crlLerla (e.g., good credlL
scores, debL-Lo-lncome raLlos, secondary crlLerla) or ls
everybody ellglble? MosL sLudenL loans requlre Lhe sLudenL
Lo be enrolled on aL leasL a half-Llme basls.
L||g|b|e expenses. Some loans are llmlLed Lo [usL
lnsLlLuLlonal charges (e.g., LulLlon and fees), whlle oLhers
lnclude llvlng expenses such as room and board, books and
personal expenses or Lhe full cosL of aLLendance.
Loan ||m|ts. WhaL are Lhe annual and aggregaLe
(cumulaLlve) loan llmlLs?
Deferment. uoes Lhe loan allow borrowers Lo defer
repaymenL durlng Lhe ln-school perlod or does lL requlre
LhaL repaymenL begln lmmedlaLely? ls Lhere a grace perlod
afLer graduaLlon before repaymenL beglns? Pow long ls Lhe
grace perlod?
kepayment p|ans. uoes Lhe lender offer a varleLy of
flexlble repaymenL plans? uoes Lhe lender offer lncome-
based repaymenL? Pow ofLen can you change repaymenL
plans? Pow long ls Lhe repaymenL Lerm ln years? Wlll Lhe
borrower sLlll be ln repaymenL when hls or her chlldren
enroll ln college? ls Lhe monLhly loan paymenL affordable?
repayment pena|t|es. 8y law, nelLher federal nor prlvaLe
sLudenL loans may have prepaymenL penalLles.
1oo|s for dea||ng w|th f|nanc|a| d|ff|cu|ty. uoes Lhe lender
offer forbearances (Lemporary suspenslons of Lhe
obllgaLlon Lo repay) lf Lhe borrower loses a [ob or
encounLers flnanclal dlfflculLy? ls Lhe forbearance full
(suspend paymenLs of prlnclpal and lnLeresL) or parLlal
(suspend paymenLs of [usL prlnclpal)? WhaL are Lhe llmlLs
on Lhe duraLlon of forbearances? uoes Lhe lender charge a
fee for each forbearance?
Cance||at|on. lederal educaLlon loans and some prlvaLe
sLudenL loans wlll dlscharge Lhe debL lf Lhe borrower dles
or becomes LoLally and permanenLly dlsabled. lederal loans
also offer publlc servlce loan forglveness.
Customer serv|ce. Are cusLomer servlce hours llmlLed, or
can you reach Lhe lender ln Lhe evenlng and on weekends?
Wlll you have Lo navlgaLe a call Lree or spend hours on
hold? uoes Lhe lender provlde an onllne loan appllcaLlon
and a self-servlce onllne accounL managemenL Lool? uoes
Lhe lender ever sell Lhe loans Lo anoLher lender, whlch can
yleld a change ln Lhe loan servlcer, or does Lhe lender
provlde llfe-of-loan servlclng? Pow well does Lhe lender
resolve problems? Are Lhere a loL of complalnLs?
8e sure Lo read Lhe flne prlnL ln Lhe promlssory noLe before
slgnlng lL. ueLalls maLLer, especlally slnce you wlll be ln
repaymenL for a decade or longer. 1he promlssory noLe ls a
blndlng legal agreemenL beLween you and Lhe lender.



Ca|cu|at|ng Month|y Loan ayments (Loan Amort|zat|on)
A level repaymenL plan on a flxed-raLe loan has Lhe same
monLhly paymenL LhroughouL Lhe loan. uurlng Lhe flrsL few
years of Lhe loan, more of each paymenL ls applled Lo lnLeresL.
As Lhe end of Lhe loan Lerm approaches, more of each paymenL
ls applled Lo reduclng Lhe loan balance. lL Lakes years before Lhe
borrower wlll noLlce a loL of progress ln reduclng Lhe debL,
especlally lf Lhere ls accrued buL unpald lnLeresL. lncreaslng Lhe
monLhly paymenL wlll acceleraLe progress ln paylng off Lhe loan,
Lhe equlvalenL of chooslng a shorLer repaymenL Lerm.
1he followlng Lable shows Lhe monLhly paymenLs on a $23,000
loan for varlous repaymenL Lerms uslng several of Lhe mosL
common lnLeresL raLes for educaLlon loans. 1o calculaLe Lhe
monLhly paymenLs on a $30,000 loan, [usL double Lhe monLhly
loan paymenLs ln Lhls Lable. 1he monLhly loan paymenLs
lncrease ln proporLlon Lo Lhe amounL owed.
Loan 1erm
Month|y Loan ayment on a 52S,000 Loan
3.4 4.S S.0 S.6 6.0 6.8 7.9
10 ?ears $246 $239 $263 $273 $278 $288 $302
12 ?ears $212 $223 $231 $239 $244 $234 $269
13 ?ears $177 $191 $198 $206 $211 $222 $237
20 ?ears $144 $138 $163 $173 $179 $191 $208
23 ?ears $124 $139 $146 $133 $161 $174 $191
30 ?ears $111 $127 $134 $144 $130 $163 $182

1he followlng Lable shows Lhe maxlmum cumulaLlve debL
correspondlng Lo a parLlcular monLhly paymenL. MulLlply Lhe
monLhly loan paymenL by 100 Lo 130 Lo calculaLe Lhe annual
salary needed Lo repay Lhe debL aL 12 and 8 debL-servlce-Lo-
lncome raLlos, respecLlvely (e.g., $300/monLh ! $30,000/year).
Loan
1erm
Month|y
ayment
Max|mum Cumu|at|ve Debt
3.4 S.0 6.8 7.9
10 ?ears $30 $3,100 $4,700 $4,300 $4,100
10 ?ears $100 $10,200 $9,400 $8,700 $8,300
10 ?ears $230 $23,400 $23,600 $21,700 $20,700
10 ?ears $300 $30,800 $47,100 $43,400 $41,400
10 ?ears $1,000 $101,600 $94,300 $86,900 $82,800
20 ?ears $30 $8,700 $7,600 $6,600 $6,000
20 ?ears $100 $17,400 $13,200 $13,100 $12,000
20 ?ears $230 $43,300 $37,900 $32,800 $30,100
20 ?ears $300 $87,000 $73,800 $63,300 $60,200
20 ?ears $1,000 $174,000 $131,300 $131,000 $120,400
30 ?ears $30 $11,300 $9,300 $7,700 $6,900
30 ?ears $100 $22,300 $18,600 $13,300 $13,800
30 ?ears $230 $36,400 $46,600 $38,300 $34,400
30 ?ears $300 $112,700 $93,100 $76,700 $68,800
30 ?ears $1,000 $223,300 $186,300 $133,400 $137,600
Impact of Var|ab|e Interest kates
MosL prlvaLe sLudenL loans have varlable lnLeresL raLes. Slnce
lnLeresL raLes are unusually low rlghL now, Lhese lnLeresL raLes
are llkely Lo lncrease over Lhe Lerm of Lhe loan. 1he followlng
charL shows how Lhe Lwo ma[or varlable raLe lndexes have
changed over Llme. Clven LhaL Lhese raLes dropped by abouL
3.3 durlng Lhe credlL crlsls, Lhey can [usL as easlly lncrease by a
slmllar amounL durlng Lhe economlc recovery.

1hls graph also shows LhaL Lhe spread beLween Lhe rlme
Lendlng 8aLe and Lhe Ll8C8 lndex ls abouL 3. 1he spread rlses
gradually by abouL 0.19 every 10 years. 8orrowers should
prefer varlable raLe loans LhaL are pegged Lo Lhe Ll8C8 lndex,
slnce Lhe Ll8C8 lndex lncreases more slowly Lhan Lhe rlme
Lendlng 8aLe. 1hls can yleld an average lnLeresL raLe LhaL ls
abouL 1/8 Lo 1/4 lower over Lhe llfe of Lhe loan.
An lncrease ln a loan's lnLeresL raLe can slgnlflcanLly affecL Lhe
monLhly loan paymenL, as demonsLraLed by Lhe followlng Lable.
lor example, a 3 lncrease ln Lhe Ll8C8 lndex wlll lncrease
monLhly loan paymenLs by abouL a quarLer for a 10-year Lerm,
by almosL half for a 20-year Lerm and by abouL Lhree-flfLhs for a
30-year Lerm.
Increase |n Month|y Loan ayment
er 1 Increase |n the Interest kate
Loan 1erm Increase
10 years 4.9 0.2
13 years 7.1 0.3
20 years 9.0 0.7
23 years 10.8 1.1
30 years 12.2 1.4
0
2
4
6
8
10
12
14
16
18
20
22
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
3
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
7
2
0
0
9
Var|ab|e Interest kate Indexes
rlme Lendlng 8aLe 1-monLh Ll8C8



As shown ln Lhe prevlous Lable, each 1 lncrease ln Lhe lnLeresL
raLe ylelds abouL a 3 lncrease ln Lhe monLhly loan paymenL for
a 10-year Lerm. Longer repaymenL Lerms yleld a blgger lncrease
ln Lhe monLhly paymenL, such as abouL 9 for a 20-year Lerm
and abouL 12 for a 30-year Lerm. Cne can approxlmaLe Lhe
lncrease as 4.3 per each 10 years of repaymenL per 1
lncrease ln Lhe lnLeresL raLe, or as 1 plus 4 per each 10 years
of repaymenL per 1 lncrease ln Lhe lnLeresL raLe.
Warn|ng about 8orrow|ng 1oo Much Money
LducaLlon debL mlghL be consldered by some Lo be good debL,
because lL ls used Lo lnvesL ln your fuLure. ?eL Loo much of a
good Lhlng can be harmful.
?ou can'L geL away from Lhls debL, as sLudenL loans are almosL
lmposslble Lo dlscharge ln bankrupLcy and Lhere ls no sLaLuLe of
llmlLaLlons on federal educaLlon loans. A successful dlscharge
requlres demonsLraLlng undue hardshlp ln an adversary
proceedlng, a very harsh sLandard. Cf roughly 72,000 borrowers
ln bankrupLcy ln 2008, only 29 had all or parL of Lhelr federal
sLudenL loans dlscharged. 1haL's 0.04. ?ou are more llkely Lo
geL cancer or dle ln a car crash Lhan Lo have your sLudenL loans
dlscharged ln bankrupLcy.
1he federal governmenL has very sLrong powers Lo compel
repaymenL of defaulLed federal educaLlon loans. 1he federal
governmenL can garnlsh up Lo 13 of your wages and lnLercepL
your lncome Lax refunds wlLhouL a courL order. 1hey can even
garnlsh Soclal SecurlLy beneflLs and Lake your loLLery wlnnlngs.
A sLudenL loan defaulL on your credlL hlsLory wlll make lL more
dlfflculL Lo geL credlL cards, auLo loans, home morLgages. lL can
even affecL your ablllLy Lo geL a [ob or renL an aparLmenL.
LducaLlon debL can also have a blg lmpacL on your llfesLyle afLer
graduaLlon. SLudenLs who graduaLe wlLh no debL are almosL
Lwlce as llkely Lo go on Lo graduaLe and professlonal school as
sLudenLs who graduaLe wlLh some debL. SLudenLs who graduaLe
wlLh excesslve debL or who defaulL on Lhelr loans are more
llkely Lo be depressed. 1hey ofLen delay geLLlng marrled, havlng
chlldren, buylng a car and buylng a home. 8orrowlng
excesslvely can be llke havlng a morLgage wlLhouL ownlng a
home. 1he debL may make lL more dlfflculL Lo save for
reLlremenL or your own chlldren's college educaLlons.
Warn|ng about Advance Iee Loan Scams
8eware of advance fee loan scams, ln whlch a scam arLlsL
requlres you Lo pay a fee before you can recelve Lhe loan. When
you pay Lhe money, Lhe promlsed loan never maLerlallzes. 8eal
educaLlonal loans deducL Lhe fees from Lhe dlsbursemenL
check. 1hey never requlre an up-fronL fee when you apply for
Lhe loan.
Also waLch ouL for scam arLlsLs sendlng you a reallsLlc buL fake
loan check. 1hey wlll have a plauslble excuse for you Lo send
Lhem some money, such as paymenL of orlglnaLlon and
guaranLee fees, before Lhe check clears your bank. 8y Lhe Llme
Lhe check ls re[ecLed by your bank, Lhe Lhlef ls long gone wlLh
your money. MosL sLudenL loan proceeds are pald dlrecLly Lo
Lhe school by Ll1, noL paper check.
1est our Loan I

1hlnk you undersLand how lnLeresL affecLs a loan?
Answer Lhls mulLlple cholce quesLlon.
?(* .".,2 ,%"&). /,64 =,'> ;6)'2&46)- /16)'6/,2
,)4 6).*1*3.< 0"1 , @ABCBBB 2",) #6.( , ABD+*,1
.*1% ,. ABE 6).*1*3. 63F
A. $1,000 u. $18,100
8. $11,000 L. $20,000
C. $13,838 l. $32,479

1he answer appears on Lhe second Lo lasL page of Lhls
qulck reference gulde.

Iedera| erk|ns Loan
1he lederal erklns Loan ls a need-based loan awarded by Lhe
college Lo sLudenLs wlLh excepLlonal flnanclal need.
1he money for Lhe erklns loan comes from a revolvlng sLudenL
loan fund. As currenL borrowers repay Lhelr loans, Lhe money ls
used Lo make loans Lo new sLudenLs. 1he number of erklns
loans varles from college Lo college.
1he erklns loan has a flxed 3 lnLeresL raLe wlLh no fees.
8epaymenL beglns 9 monLhs afLer graduaLlon or dropplng
below half-Llme enrollmenL sLaLus. 1he repaymenL Lerm ls 10
years, buL borrowers can obLaln longer repaymenL Lerms by
consolldaLlng erklns loans.
1he erklns loan ls subsldlzed, meanlng LhaL Lhe federal
governmenL pays Lhe lnLeresL on Lhe loan durlng Lhe ln-school
and grace perlods and oLher defermenLs. 1he subsldlzed
lnLeresL beneflL ls losL upon consolldaLlon of a erklns loan.
1he erklns loan prevlously provlded up-fronL loan forglveness
for borrowers who worked ln cerLaln occupaLlons. A porLlon of
Lhe loan was forglven for each year of full-Llme servlce.



Powever, Congress has noL provlded fundlng for Lhls loan
forglveness program slnce l?2010 and ls unllkely Lo provlde
fundlng ln Lhe fuLure. Powever, erklns loan borrowers may
obLaln publlc servlce loan forglveness (a back-end loan
forglveness program LhaL requlres 10 years of full-Llme servlce)
by consolldaLlng Lhelr loans lnLo Lhe ulrecL Loan program.
erk|ns Loan L|m|ts
ear |n Schoo|
Annua|
Loan L|m|t
Aggregate
Loan L|m|t
Average
Loan
undergraduaLe SLudenLs $3,300 $27,300 $2,000
CraduaLe and
rofesslonal SLudenLs
$8,000 $60,000 $3,630

Iedera| Stafford Loan
1he lederal SLafford Loan has Lwo verslons, subsldlzed and
unsubsldlzed. Subsldlzed SLafford loans are awarded based on
flnanclal need. unsubsldlzed SLafford loans are noL based on
flnanclal need. 1he governmenL pays Lhe lnLeresL on subsldlzed
SLafford loans durlng Lhe ln-school and grace perlods and oLher
defermenLs. 1he lnLeresL on unsubsldlzed SLafford loans
conLlnues Lo accrue durlng Lhe ln-school, grace and defermenL
perlods. 1he borrower may defer paylng Lhe lnLeresL by
caplLallzlng lL, whlch adds lL Lo Lhe loan balance. CaplLallzlng
lnLeresL can lncrease a borrower's debL by as much as 20 by
Lhe Llme Lhe borrower enLers repaymenL.
Slnce !uly 1, 2010, all new SLafford and LuS loans have been
made Lhrough Lhe ulrecL Loan program, wlLh money provlded
by Lhe uS ueparLmenL of LducaLlon Lhrough ellglble colleges
and unlverslLles. lederal educaLlon loans are no longer made by
banks and oLher flnanclal lnsLlLuLlons, alLhough some educaLlon
lenders may be lnvolved ln Lhe servlclng of loans ln Lhe ulrecL
Loan program.
8epaymenL beglns 6 monLhs afLer graduaLlon or dropplng
below half-Llme enrollmenL sLaLus. 1he sLandard repaymenL
Lerm ls 10 years (up Lo 23 years wlLh lncome-based repaymenL),
buL borrowers can obLaln longer repaymenL Lerms by
consolldaLlng Lhelr SLafford loans.
1he SLafford loan has
flxed lnLeresL raLes
and a 1 defaulL fee.
1he defaulL fee ls
deducLed from Lhe
dlsbursemenL check.
1he lnLeresL raLe on
Lhe unsubsldlzed
SLafford loan ls 6.8
for undergraduaLe, graduaLe and professlonal sLudenLs. 1he
lnLeresL raLe on Lhe subsldlzed SLafford loan for undergraduaLe
sLudenLs depends on Lhe academlc year, as lllusLraLed ln Lhe
prevlous Lable. Subsldlzed SLafford loans are no longer avallable
Lo graduaLe and professlonal sLudenLs slnce !uly 1, 2012.
1he annual llmlLs on Lhe SLafford loan depend on wheLher Lhe
loan ls subsldlzed or unsubsldlzed, on Lhe borrower's
dependency sLaLus and on Lhe borrower's year ln school.
uependenL sLudenLs whose parenLs are denled a arenL LuS
loan are ellglble Lo borrow aL Lhe lndependenL sLudenL llmlLs,
whlch are $4,000/year hlgher durlng Lhe freshman and
sophomore years and $3,000/year hlgher durlng Lhe [unlor and
senlor years. SLudenLs can borrow unsubsldlzed SLafford loans
up Lo Lhe overall llmlL mlnus any amounLs recelved as
subsldlzed SLafford loans. 1he subsldlzed SLafford loan llmlLs are
Lhe same for dependenL and lndependenL sLudenLs.
Annua| Loan L|m|ts
ear |n Schoo|
Subs|d|zed
Stafford
Unsubs|d|zed Stafford Loan
Dependent Independent
lreshman $3,300 $3,300 $9,300
Sophomore $4,300 $6,300 $10,300
!unlor $3,300 $7,300 $12,300
Senlor $3,300 $7,300 $12,300
reparaLory Coursework
undergraduaLe rograms
$2,623 $2,623 $8,623
reparaLory Coursework
CraduaLe rograms
$3,300 $3,300 $12,300
1eacher CerLlflcaLlon $3,300 $3,300 $12,300
CraduaLe and
$8,300 nA $20,300
Medlcal School SLudenLs $8,300 nA $40,300

1he aggregaLe loan llmlLs on Lhe SLafford loan depend on
wheLher Lhe loan ls subsldlzed or unsubsldlzed, on Lhe
borrower's dependency sLaLus and on Lhe borrower's year ln
school. uependenL sLudenLs whose parenLs are denled a arenL
LuS loan are ellglble Lo borrow from Lhe unsubsldlzed SLafford
loan program aL Lhe hlgher lndependenL sLudenL llmlLs.
AggregaLe loan llmlLs for subsldlzed SLafford loans Lo graduaLe,
professlonal and medlcal school sLudenLs lnclude
undergraduaLe sLudenL loans.
Aggregate Loan L|m|ts
ear |n Schoo|
Subs|d|zed
Stafford
Unsubs|d|zed Stafford Loan
Dependent Independent
undergraduaLe SLudenLs $23,000 $31,000 $37,300
CraduaLe and
$63,300 nA $138,300
Medlcal School SLudenLs $63,300 nA $224,000

Iedera| LUS Loan
1he lederal LuS Loan has Lwo verslons, one for parenLs of
dependenL undergraduaLe sLudenLs (arenL LuS Loan) and one
for graduaLe and professlonal sLudenLs (Crad LuS Loan). 1he
Lerms of Lhe loans are ldenLlcal. lndependenL undergraduaLe
ear
Undergraduate Students
Stafford Loan Interest kate
Subs|d|zed Unsubs|d|zed
2007-08 6.8 6.8
2008-09 6.0 6.8
2009-10 3.6 6.8
2010-11 4.3 6.8
2011-12 3.4 6.8
2012-13 6.8 6.8



sLudenLs are noL ellglble Lo have Lhelr parenLs borrow from Lhe
arenL LuS loan program. (lndependenL undergraduaLe
sLudenLs have hlgher unsubsldlzed SLafford loan llmlLs.)
1he LuS loan has a flxed 7.9 lnLeresL raLe wlLh 4 fees. 1he
LuS loan ls an unsubsldlzed loan, wlLh lnLeresL accrulng durlng
ln-school, grace and defermenL perlods.
Crad LuS loan borrowers may defer repaymenL durlng Lhe ln-
school perlod, buL Lhere ls no grace perlod afLer Lhe sLudenL
graduaLes or drops below half-Llme enrollmenL. arenL LuS
loan borrowers may defer repaymenL whlle Lhe sLudenL ls ln
school and durlng a 6-monLh grace perlod afLer Lhe sLudenL
graduaLes or drops below half-Llme enrollmenL sLaLus.
CLherwlse repaymenL beglns 60 days afLer full dlsbursemenL.
1he repaymenL Lerm ls 10 years (Crad LuS loans can geL up Lo
23 years wlLh lncome-based repaymenL), buL borrowers can
obLaln longer repaymenL Lerms by consolldaLlng LuS loans.
1he LuS loan ls Lhe only federal educaLlon loan LhaL conslders
Lhe borrower's credlL hlsLory. LllglblllLy does noL depend on
credlL scores, buL raLher on wheLher Lhe borrower has an
adverse credlL hlsLory. An adverse credlL hlsLory ls deflned as
havlng a derogaLory evenL wlLhln Lhe lasL 3 years (e.g., Lax llen,
bankrupLcy, foreclosure, repossesslon, wage garnlshmenL or
defaulL deLermlnaLlon) or a currenL dellnquency on any debL of
90 or more days. 8orrowers wlLh an adverse credlL hlsLory may
sLlll obLaln Lhe LuS loan wlLh a credlLworLhy endorser
(coslgner). uependenL sLudenLs whose parenLs are denled a
arenL LuS loan are ellglble for Lhe hlgher unsubsldlzed
SLafford loan llmlLs avallable Lo lndependenL sLudenLs.
1he annual loan llmlL on Lhe LuS loan ls up Lo Lhe full cosL of
aLLendance mlnus oLher ald recelved. 1here ls no aggregaLe
loan llmlL. CraduaLe sLudenLs are requlred Lo exhausL Lhe
SLafford loan llmlLs before borrowlng from Lhe Crad LuS loan
program. 1here ls no slmllar requlremenL for arenL LuS loans,
buL famllles are advlsed Lo exhausL Lhe lederal SLafford loan
llmlLs flrsL, slnce Lhe SLafford loan ls a less expenslve loan.
1o obLaln a Crad LuS or arenL LuS loan, conLacL your
college's flnanclal ald offlce.
Iedera| Conso||dat|on Loan
1he lederal ConsolldaLlon Loan ls used Lo comblne several
federal educaLlon loans lnLo a slngle loan. 1hls wlll sLreamllne
repaymenL buL does noL save money.
ConsolldaLlon also provldes access Lo alLernaLe repaymenL plans
LhaL reduce Lhe monLhly paymenL by lncreaslng Lhe Lerm of Lhe
loan. 8orrowers can obLaln repaymenL Lerms of up Lo 30 years,
dependlng on Lhe amounL borrowed. lncreaslng Lhe repaymenL
Lerm can slgnlflcanLly lncrease Lhe cosL of Lhe loan. lor
example, lncreaslng Lhe repaymenL Lerm on an unsubsldlzed
SLafford loan from 10 years Lo 20 years wlll cuL Lhe monLhly
paymenL by a Lhlrd, buL lL wlll also more Lhan double Lhe LoLal
lnLeresL pald over Lhe llfe of Lhe loan (a facLor of 2.18 lncrease).
52S,000 Q 6.8
Loan 1erm
Month|y
ayment
1ota|
Interest
1ota|
ayments
10 ?ears $288 $9,324 $34,324
20 ?ears $191 $20,802 $43,802
ulfference - $97 $11,278 $11,278
Change - 33.7 x 2.18 + 32.7

1he lnLeresL raLe on a federal consolldaLlon loan ls a flxed
lnLeresL raLe LhaL ls Lhe welghLed average of Lhe lnLeresL raLes
on Lhe loans belng consolldaLed, rounded up Lo Lhe nearesL
1/8
Lh
of a percenLage polnL and capped aL 8.23. 1he welghLed
average preserves Lhe overall cosL of Lhe consolldaLed loans and
wlll always be beLween Lhe hlghesL and lowesL lnLeresL raLes.
r|vate Student Loans
rlvaLe sLudenL loans (www.flnald.org/prlvaLesLudenLloans),
also called alLernaLlve sLudenL loans, are non-federal loans
made by banks and oLher flnanclal lnsLlLuLlons. Some prlvaLe
sLudenL loans are made by non-proflL sLaLe loan agencles. 1he
Lerms of Lhe loans are seL by Lhe lender, noL Lhe federal
governmenL, and vary from lender Lo lender.
MosL prlvaLe sLudenL loans are credlL-underwrlLLen, wlLh
ellglblllLy based on Lhe credlL scores of Lhe borrower and a
credlLworLhy coslgner, lf any. lf Lhe borrower has a Lhln or non-
exlsLenL credlL hlsLory, or Lhe borrower's credlL score does noL
saLlsfy credlL crlLerla, a coslgner wlll be requlred. Lven lf Lhe
borrower has a saLlsfacLory credlL score, lL ls beLLer for Lhe
borrower Lo have a coslgner. LllglblllLy, lnLeresL raLes and fees
are based on Lhe beLLer of Lhe Lwo credlL scores.
noLe, however, LhaL a coslgner ls a co-borrower, equally
obllgaLed Lo repay Lhe loan. uellnquencles and defaulLs on a
coslgned prlvaLe sLudenL loan are reporLed on Lhe credlL hlsLory
of boLh Lhe borrower and coslgner.
Many lenders have coslgner release opLlons, whlch release Lhe
coslgner from hls or her obllgaLlons afLer 12, 24, 36 or 48
monLhs of consecuLlve on-Llme monLhly paymenLs, provlded
LhaL Lhe prlmary borrower saLlsfles credlL crlLerla. 8orrowers
have reporLed some dlfflculLy ln quallfylng for coslgner release
requlremenLs. AnoLher approach Lo coslgner release ls for Lhe
prlmary borrower Lo obLaln a prlvaLe consolldaLlon loan wlLhouL
a coslgner. 1hls wlll pay off Lhe orlglnal prlvaLe sLudenL loans,
effecLlvely releaslng Lhe coslgner from hls or her obllgaLlon.



lnLeresL raLes on mosL prlvaLe sLudenL loans are varlable,
Lyplcally changlng on a monLhly, quarLerly or annual basls. 1he
lnLeresL raLe ls pegged Lo a varlable raLe lndex plus a flxed raLe
margln. Common lndexes lnclude Lhe 1-monLh or 3-monLh
Ll8C8 lndex or Lhe rlme Lendlng 8aLe. Clven LhaL lnLeresL raLes
are unusually low rlghL now, varlable lnLeresL raLes wlll
probably lncrease slgnlflcanLly over Lhe Lerm of Lhe loan.
1he flxed raLe margln depends on Lhe hlgher of Lhe Lwo credlL
scores. 1yplcally, lenders wlll group credlL scores lnLo 3 or 6
Llers, wlLh each Ller belng asslgned Lo a parLlcular lnLeresL raLe.
8orrowers wlLh excellenL credlL (ln Lhe Lop Ller) mlghL geL an
lnLeresL raLe of Ll8C8 + 2.0, whlle borrowers wlLh lnferlor
credlL (ln Lhe boLLom Ller) mlghL geL an lnLeresL raLe of Ll8C8 +
10.0 or hlgher. MosL prlvaLe sLudenL loans requlre a credlL
score of aL leasL 630 on an 830 scale, Lhough some lenders have
much hlgher mlnlmum credlL scores.
8orrowers wlLh excellenL credlL scores may sLlll be denled a
prlvaLe sLudenL loan because of secondary crlLerla, such as a
hlgh debL-servlce-Lo-lncome raLlo (e.g., lnsufflclenL lncome or
excesslve debL), volaLlle annual lncome and self-employmenL.
Cenerally, prlvaLe sLudenL loans are more expenslve Lhan
federal sLudenL loans. 8orrowers should exhausL federal loan
ellglblllLy (and glfL ald, such as governmenL granLs and prlvaLe
scholarshlps) before conslderlng a prlvaLe sLudenL loan.
needlng Lo borrow a prlvaLe sLudenL loan (or a arenL LuS
loan) can be a slgn of overborrowlng. SLudenLs are more llkely
Lo need prlvaLe loans aL hlgh-cosL colleges or lnsLlLuLlons LhaL
do noL meeL Lhelr full demonsLraLed flnanclal need.
Shop around for Lhe lowesL raLe when borrowlng from prlvaLe
sLudenL loan programs. rlvaLe sLudenL loans from sLaLe loan
agencles Lend Lo be sllghLly less expenslve for sLaLe resldenLs
and ln-sLaLe sLudenLs Lhan prlvaLe sLudenL loans from banks and
oLher flnanclal lnsLlLuLlons, buL lL ls lmposslble Lo predlcL whlch
lender wlll offer an lndlvldual borrower Lhe besL raLes. 1he
lender wlLh Lhe lowesL adverLlsed raLe wlll noL necessarlly be
Lhe lender LhaL offers you Lhe besL raLe. lL ls ofLen necessary Lo
apply for several loans Lo flnd Lhe besL raLes. 1here are a varleLy
of loan comparlson slLes (www.flnald.org/loancomparlson), buL
mosL compare lnLeresL raLes from only a handful of lenders or
do noL compare acLual raLes.
r|vate Conso||dat|on Loans
lederal and prlvaLe sLudenL loans cannoL be consolldaLed
LogeLher. 8orrowers who wanL Lo consolldaLe Lhelr prlvaLe
sLudenL loans wlll need Lo obLaln a prlvaLe consolldaLlon loan
(www.flnald.org/prlvaLeconsolldaLlon). 8orrowers mlghL seek a
prlvaLe consolldaLlon loan Lo sLreamllne repaymenL, Lo release a
coslgner from Lhe repaymenL obllgaLlon, or Lo geL a lower
lnLeresL raLe.
1he lnLeresL raLes on a prlvaLe consolldaLlon loan wlll depend
on Lhe borrower's and coslgner's credlL scores, [usL llke Lhe
orlglnal prlvaLe sLudenL loans. 1yplcally a sLudenL's credlL score
wlll decrease wlLh each successlve year ln school, and Lhen sLarL
lncreaslng afLer graduaLlon lf Lhe borrower makes all Lhe
paymenLs on Lhe loans on Llme as per Lhe agreemenL. lor a
borrower Lo geL a beLLer lnLeresL raLe on Lhe prlvaLe
consolldaLlon loan, Lhe hls or her credlL score wlll have Lo be aL
leasL 30-100 polnLs beLLer Lhan Lhe hlgher of Lhe borrower's or
coslgner's credlL scores when Lhe orlglnal loans were borrowed.
Powever, you may wanL Lo keep Lhe loans separaLe lf Lhe
lnLeresL raLes dlffer, because Lhls wlll leL you save money by
LargeLlng Lhe loans wlLh Lhe hlghesL lnLeresL raLes for earller
repaymenL. (1here are no prepaymenL penalLles on sLudenL
loans.) lor example, suppose you have $11,820 ln 6.8 loans
and $10,000 ln 3.6 loans and could consolldaLe Lhem aL
6.23, all wlLh 10-year repaymenL Lerms. AfLer maklng Lhe
requlred paymenLs on Lhe loans, lf you apply an exLra $30 a
monLh Lo acceleraLe repaymenL of Lhe 6.8 loans, you'd save
abouL $121 more Lhan applylng lL Lo Lhe consolldaLlon loan.
nome Lqu|ty Loans and L|nes of Cred|t
Pome equlLy loans Lyplcally have flxed raLes LhaL are
compeLlLlve wlLh Lhe arenL LuS loan. Pome equlLy llnes of
credlL (PLLCC) Lyplcally have varlable raLes LhaL are compeLlLlve
wlLh prlvaLe sLudenL loans.
Pome equlLy loans and llnes of credlL Lyplcally have a 10 or 13
year repaymenL Lerm. lederal educaLlon loans sLarL off wlLh a
10-year repaymenL Lerm, buL borrowers can geL alLernaLe
repaymenL plans wlLh loan Lerms of up Lo 30 years. Powever,
parenL borrowers should sLlck wlLh a 10-year Lerm, slnce Lhey
should seek Lo pay off all debL by reLlremenL.
1here ls no ln-school defermenL or economlc hardshlp
defermenL on home equlLy loans and llnes of credlL, unllke Lhe
arenL LuS loan.
lnLeresL pald on home equlLy loans and llnes of credlL ls Lax
deducLlble on your federal lncome Lax reLurn, lf you lLemlze
deducLlons on Schedule A of l8S lorm 1040. 1hls lncludes Lhe
lnLeresL on up Lo $100,000 used Lo pay for lLems oLher Lhan
lmprovemenL of Lhe home, such as paylng for college.
lf you defaulL on a home equlLy loan or llne of credlL, you can
lose your home. 8emember: LducaLlon lenders can'L repossess
your educaLlon.



Cred|t Card Debt
1he CredlL CA8u AcL of 2009 has made credlL cards less
avallable Lo college sLudenLs by requlrlng a coslgner for mosL
flnanclally dependenL sLudenLs under age 21. Lven so, college
sLudenLs should pay off Lhelr credlL card balances ln full each
monLh Lo avold spendlng beyond Lhelr means and Lo cuL cosLs.
CredlL cards are generally more expenslve Lhan prlvaLe sLudenL
loans. 1hey are noL ellglble for Lhe sLudenL loan lnLeresL
deducLlon, even lf used Lo pay for school. Whlle some credlL
cards may offer rebaLes of up Lo 1, Lhe flne prlnL usually
excludes LulLlon from ellglblllLy. Colleges may even charge a fee
for LulLlon paymenLs made wlLh a credlL card.
CredlL card llmlLs are usually lower Lhan Lhe aggregaLe llmlLs on
sLudenL loans. MosL credlL cards do noL have flexlble repaymenL
plans. CredlL card debL cannoL be deferred whlle Lhe sLudenL ls
ln school or durlng an economlc hardshlp. Mlnlmum paymenLs
on a credlL card are based on a percenLage of Lhe ouLsLandlng
balance (e.g., 4), so Lhey sLarL off hlgher and gradually
decrease. CredlL card debL can be dlscharged ln bankrupLcy.
8orrow|ng from ket|rement |ans
?ou may be able Lo borrow for college expenses from a 401(k),
403(b) or 437(b) plan buL noL from an l8A. ?ou can borrow up
Lo half of Lhe vesLed balance ln your 401(k) plan or $30,000,
whlchever ls less, Lo pay for college expenses for yourself, your
spouse, or your chlldren. (Some plans provlde an excepLlon
whlch leLs you borrow up Lo $10,000 lf 30 of Lhe vesLed
balance ls less Lhan $10,000.) 1he debL musL be repald wlLhln 3
years ln subsLanLlally level paymenLs on aL leasL a quarLerly
basls over Lhe llfe of Lhe loan. ?ou may have Lo repay Lhe debL
lmmedlaLely lf you lose your [ob, oLherwlse you wlll have Lo pay
lncome Laxes and a 10 Lax penalLy on Lhe remalnlng loan
balance (lncludlng any accrued buL unpald lnLeresL). usually Lhe
loan's lnLeresL raLe wlll be a percenLage polnL or Lwo above Lhe
prlme lendlng raLe. 1he lnLeresL ls noL Lax deducLlble. AlLhough
you are paylng yourself lnLeresL, Lhose lnLeresL paymenLs are
merely subsLlLuLlng for Lhe money Lhe reLlremenL funds would
have been earnlng oLherwlse.
G|ossary of 1erms
Adverse Cred|t n|story. 1o be ellglble for a lederal LuS loan,
Lhe borrower may noL have an adverse credlL hlsLory, whlch ls
deflned as havlng had a bankrupLcy, foreclosure, repossesslon,
Lax llen, wage garnlshmenL or defaulL deLermlnaLlon ln Lhe lasL
flve years or a currenL dellnquency of 90 or more days.
A|ternat|ve Student Loan. See G167,.* H.&4*). I",).
Amort|zat|on. AmorLlzaLlon ls Lhe gradual paylng off of a debL
Lhrough perlodlc lnsLallmenLs of prlnclpal and lnLeresL.
Ak. 1he Annual ercenLage 8aLe (A8) ls Lhe annuallzed raLe
of lnLeresL, lncludlng Lhe nomlnal lnLeresL raLe, fees and Lerm of
Lhe loan, as well as Lhe lmpacL of Lhe ln-school defermenL. A 10-
year 6.8 loan wlLh 1 fees and no defermenL has an A8 of
7.02. WlLh a 20-year Lerm Lhe A8 ls lower (6.93), because
Lhe fees are amorLlzed over a longer Lerm. A 10-year 7.9 loan
wlLh 4 fees and no defermenL has an A8 of 8.84.
Cap|ta||zat|on of Interest. lnLeresL caplLallzaLlon occurs when
unpald lnLeresL ls added Lo Lhe loan balance. 1hls causes Lhe
loan Lo grow larger, lncreaslng Lhe cosL of Lhe loan. lnLeresL can
be caplLallzed monLhly, quarLerly, annually or when Lhe loan
enLers repaymenL. CaplLallzaLlon causes lnLeresL Lo be charged
on Lop of lnLeresL, also referred Lo as compoundlng of lnLeresL.
Conso||dat|on. ConsolldaLlon ls a form of reflnance, where
mulLlple loans are comblned lnLo a new loan wlLh a slngle
monLhly paymenL.
Cos|gner. A coslgner ls a co-borrower, equally as obllgaLed Lo
repay Lhe debL as Lhe prlmary borrower.
Cost of Attendance. 1he cosL of aLLendance ls Lhe full one-year
cosL of enrolllng ln college, lncludlng LulLlon and fees, room and
board, LexLbooks and supplles, as well as Lravel and
LransporLaLlon, personal expenses, compuLer, sLudenL healLh
lnsurance and dependenL care.
Defau|t. uefaulL occurs when a borrower falls Lo make
paymenLs on a federal loan for 360 days and on a prlvaLe
sLudenL loan for 120 days. A defaulLed loan ls due ln full
lmmedlaLely and may be senL Lo a collecLlon agency.
Defau|t Iee. See J&,1,).** K**L
Deferment. uefermenL ls Lhe Lemporary suspenslon of Lhe
obllgaLlon Lo repay a debL. lnLeresL on subsldlzed loans ls pald
by Lhe federal governmenL durlng a defermenL. lnLeresL on
unsubsldlzed loans conLlnues Lo accrue and remalns Lhe
responslblllLy of Lhe borrower and ls caplLallzed lf unpald.
lederal educaLlon loans may be deferred whlle Lhe borrower ls
enrolled aL leasL half-Llme, durlng Lhe grace perlod and durlng
Answer to Loan I 1est
C. $13,838 ls Lhe correcL answer
A good rule of Lhumb for esLlmaLlng Lhe lnLeresL pald over Lhe
llfeLlme of a loan ls Lo mulLlply Lhe loan amounL, lnLeresL raLe and
loan Lerm ln years, and dlvlde Lhe resulL by 2. 1hls ylelds an
underesLlmaLe of Lhe LoLal lnLeresL, $3,000 ln Lhls example. (1he
acLual amounL ls $3,838.) uon'L forgeL LhaL Lhe monLhly loan
paymenLs also pay off Lhe orlglnal $10,000 loan balance.



perlods of economlc hardshlp. 1he economlc hardshlp
defermenL has a Lhree-year llmlL. See also K"1=*,1,)'*L
De||nquent. A dellnquency occurs when a borrower falls Lo
make paymenLs on a loan when due. lf a borrower ls dellnquenL
long enough, Lhe loan wlll go lnLo defaulL.
D|sbursement. ulsbursemenL ls Lhe paymenL of a loan's
proceeds Lo Lhe sLudenL and college. Loans may be pald ln
mulLlple dlsbursemenLs.
Iedera| Lducat|on Loan. lederal educaLlon loans are cheaper,
more avallable and have beLLer repaymenL Lerms Lhan prlvaLe
sLudenL loans. 1he lnLeresL raLes on federal loans are flxed,
whlle mosL prlvaLe loans have varlable raLes. Lxamples lnclude
Lhe lederal erklns, SLafford and LuS Loans. Slnce !uly 1, 2010,
all new federal educaLlon loans have been made Lhrough Lhe uS
ueparLmenL of LducaLlon's ulrecL Loan program.
Iorbearance. A forbearance ls a Lemporary suspenslon of Lhe
obllgaLlon Lo repay a debL. lnLeresL conLlnues Lo accrue durlng a
forbearance and wlll be caplLallzed lf unpald. unllke a
defermenL, Lhe borrower ls responslble for Lhe lnLeresL on boLh
subsldlzed and unsubsldlzed loans durlng a forbearance.
lorbearances on federal educaLlon loans have a flve-year llmlL.
Iorg|veness. lorglveness ls cancellaLlon of a debL, usually for
worklng ln a parLlcular occupaLlon, such as a publlc servlce [ob,
Leachlng ln a naLlonal shorLage area or servlng ln Lhe mlllLary.
Grace er|od. 1he grace perlod ls Lhe Llme afLer Lhe sLudenL
graduaLes, wlLhdraws or drops below half-Llme enrollmenL and
before repaymenL beglns. 1he grace perlod ls 6 monLhs for Lhe
lederal SLafford and arenL LuS loans and for mosL prlvaLe
sLudenL loans, and 9 monLhs for Lhe lederal erklns loan. 1he
Crad LuS loan does noL have a grace perlod.
Guarantee Iee. A guaranLee fee, someLlmes called a defaulL
fee, ls a fee charged by a lender Lo cover Lhe cosL of defaulLs. lL
effecLlvely lnsures Lhe lender agalnsL borrower defaulLs.
Interest. lnLeresL ls a perlodlc fee charged for Lhe use of
borrowed money. 1he lnLeresL raLe ls expressed as a
percenLage of Lhe loan balance and may be flxed or varlable.
Lender. A lender ls a bank, governmenL agency or flnanclal
lnsLlLuLlon LhaL lends money Lo borrowers.
LI8Ck. 1he London lnLerbank Cffered 8aLe (Ll8C8) ls a varlable
raLe lndex LhaL ls based on Lhe average lnLeresL raLe pald on
deposlLs of uS dollars ln Lhe London markeL. lL ls used ln Lhe
prlclng of securlLlzaLlons of sLudenL loans.
Loan. A loan ls borrowed money LhaL musL be repald usually
wlLh lnLeresL. See also K*4*1,2 M4&',.6") I",) and G167,.*
H.&4*). I",).
Loan L|m|t. 1he maxlmum amounL one can borrow, elLher per
year (annual llmlL) or cumulaLlve (aggregaLe llmlL).
Master rom|ssory Note (MN). A promlssory noLe ls a legal
conLracL ln whlch Lhe borrower agrees Lo repay Lhe loan. lL
speclfles Lhe Lerms of Lhe loan, such as Lhe lnLeresL raLes and
fees. 1he MasLer romlssory noLe ls a promlssory noLe LhaL ls
effecLlve for a conLlnuous perlod of enrollmenL up Lo 10 years.
repay. 1o prepay a loan ls Lo make a paymenL before lL ls due,
acceleraLlng repaymenL of Lhe loan. 1here are no prepaymenL
penalLles (exLra charges) on federal and prlvaLe sLudenL loans.
r|me Lend|ng kate. 1he rlme Lendlng 8aLe ls a varlable raLe
lndex LhaL ls Lhe lnLeresL raLe LhaL banks charge Lhelr mosL
credlLworLhy cusLomers.
r|nc|pa|. 1he prlnclpal ls Lhe amounL of money borrowed or
sLlll owed on a loan, noL lncludlng lnLeresL and oLher charges.
r|vate Student Loan. A prlvaLe sLudenL loan ls made and
funded by a prlvaLe lender, such as a bank or oLher flnanclal
lnsLlLuLlon. rlvaLe sLudenL loans Lend Lo be more expenslve
Lhan federal loans and have less flexlble repaymenL Lerms.
rom|ssory Note. See N,3.*1 G1"%633"1+ O".*.
kepayment 1erm. See ?*1%L
Serv|cer. 1he servlcer of a loan collecLs paymenLs and manages
all correspondence and sLaLemenLs.
Subs|d|zed Loan. 1he federal governmenL pays Lhe lnLeresL on
subsldlzed loans durlng Lhe ln-school defermenL, durlng Lhe
grace perlod before repaymenL beglns and durlng an economlc
hardshlp defermenL. 1he lederal erklns Loan and lederal
Subsldlzed SLafford Loan are examples of subsldlzed loans.
LllglblllLy ls based on demonsLraLed flnanclal need.
1erm. 1he lengLh of Llme durlng whlch a loan ls repald. Also
referred Lo as Lhe P*/,+%*). ?*1%.
1u|t|on Insta||ment |an. A LulLlon lnsLallmenL plan or LulLlon
paymenL plan spreads ouL college cosLs lnLo 9-12 equal monLhly
lnsLallmenLs. 1ulLlon lnsLallmenL plans usually charge an up-
fronL fee wlLhouL separaLe lnLeresL charges. 1hls ls ln conLrasL
wlLh loans whlch are Lyplcally repald over a much longer Lerm
and whlch usually charge lnLeresL.
Unsubs|d|zed Loan. lnLeresL on unsubsldlzed loans conLlnues Lo
accrue durlng Lhe ln-school defermenL, durlng Lhe grace perlod
before repaymenL beglns and durlng an economlc hardshlp
defermenL. lf Lhe borrower does noL pay Lhe lnLeresL as lL
accrues, Lhe lnLeresL ls caplLallzed (added Lo Lhe loan balance).
1he lederal unsubsldlzed SLafford Loan and Lhe lederal LuS
Loan are examples of unsubsldlzed loans. LllglblllLy ls noL based
on flnanclal need, so even wealLhy famllles may quallfy.

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