Pay No Interest on Your Student Loan

Low Income College Funding

Although most students receive some form of financial assistance during college, there is no cookie cutter solution for landing the best aid.  Each student’s needs are different, so financial aid is a custom-tailored pursuit; as unique as the diverse students who need it.  There are, however, time-tested strategies that help students meet university expenses.  First and foremost; every student requiring financial assistance for college requests financial aid from the U.S. Department of Education.

Some of the most prolific student assistance opportunities originate from government-sponsored programs designed to advance higher education.  Pell Grants provide college funding that does not require repayment, so the perennial federal program stands as an important resource for qualified low-income applicants.  Federal Supplemental Education Opportunity Grants  (FSEOG) furnish additional gift-aid to degree candidates who are severely challenged financially.  State Governments provide additional financial resources that mirror federal efforts; providing need-based funding that sometimes includes service agreements that put graduates to work within the states that help them pay for college.

When scholarships and grants leave educational budgets underfunded, cash-strapped students turn to college loans to bridge the affordability gap.  Private student loans are available, but terms and conditions are sometimes prohibitive.  Loans for college are best acquired through federally backed programs that provide low-interest fixed rate options for student borrowers.  The William D. Ford Federal Direct Loan Program provides subsidized and unsubsidized loans for graduate students and undergraduates pursuing university degrees.

File Your FAFSA First

The first step toward landing any type of federal student assistance is to complete the required application.  The Free Application for Federal Student Assistance (FAFSA) compiles data about you and your family that helps financial aid officials determine your college funding needs.  Income, assets and the number of brothers and sisters attending college concurrently each impact financial aid evaluations.  Once your Expected Family Contribution is determined, financial aid administrators at your university draw from available on-campus programs to cover your expenses.

Most students ultimately underwrite college costs with blended packages of aid that include grants, scholarships and loans.  The best alternatives for student borrowers include federally-backed Subsidized Loans, Unsubsidized Loans and PLUS Loans for parents and independent students.

Popular Federal Loans Include Subsidized Options

Until recently, Federal Stafford Loans were backed by the U.S. Government, but issued by private lenders.  In other words, students would be qualified first by the Department of Education, and then they would enter into private loan agreements with banks, credit unions and other lenders.  Today, Federal Direct Loans are issued by Uncle Sam, to cut out the middleman and save administration costs.

Under the new program, qualified students borrow money for school that is subject to different regulations; depending on the timing and status of each loan.

Subsidized Loans – Issued based on financial need demonstrated by FAFSA applications.  Qualified borrowers do not pay interest during certain periods over the life of the loan.  The Federal Government subsidizes interest payments:

• While the borrower is in school
• During a six-month grace period after the borrower leaves school*
• During any periods of repayment deferment

Interest rates are fixed and low, currently holding at 3.4% for Subsidized Direct Loans.

* Subsidized Loans issued after July 1st, 2012 do not qualify for government interest payments during the six-month grace period after a student leaves college.  Interest that is not paid by borrowers during grace periods is capitalized, and must be repaid along with loan principal.

Unsubsidized Loans – Applicants are not required to exhibit significant financial disadvantage in order to qualify for these federally-backed loans.  Interest is the responsibility of the borrower at all times during the course of the loan, including while the student attends college.  Interest rates are currently below market rates for private loans; holding at 6.8% for unsubsidized borrowers.

PLUS Loans are designed for parents who wish to borrow for a child’s education.  Independent students are also eligible for PLUS Loans under some circumstances.  Interest rates are higher than other Direct Loan programs; 7.9%, but still provide competitive terms for borrowers.

Flexible Repayment For Federal Direct Subsidized Loans

Federal loans eventually come due, but several payment options allow students to address debt with flexible terms. Subsidized Loan program participants choose from these structured repayment plans:

Standard Repayment Plan – Borrowers pay less total interest by paying on standard schedules.  Fixed monthly payments of at least $50 each are required, and loans are repaid within ten years.

Graduated Repayment Plan – Payments start on the lower side for graduates that are establishing careers, and then increase as repayment continues over the course of ten years.  More interest is paid by borrowers who choose this plan, but adjustments to payment amounts – usually every two years – allow participants to stay current with repayment.

Extended Repayment Plan – Payments are made for as long as 25 years under this option.  Total interest paid is based on the extended repayment timetable selected by each borrower, and loan repayment amounts may be fixed or graduated.

Income-Based Repayment Plan – This plan considers each participant’s income level.  Student loan payments are structured to represent no more than 15% of each borrower’s discretionary income.  Payment amounts change as incomes rise, allowing borrowers to extend payments over 25 years.

Pay As You Earn Repayment Plan – The newest alternative offered for loan repayment is aimed at student borrowers struggling with college debt.  The accommodating option allows repayment that reflects no more than 10% of a borrower’s discretionary income.  Low monthly payments may be extended for 20 years, or until the obligation is satisfied.