The FAFSA explained

The acronym "FAFSA" stands for the Free Application for Federal Student Aid. It is the key document in obtaining Federal student loan assistance for university students and/or their parents.

Typically completed and submitted annually during a student’s college years, this application predominantly consists of questions regarding the student’s (and his/her parents’) financial situation.

After submission, their statistics are entered into a database to determine the family’s EFC (Expected Family Contribution) and eligibility for Federal student assistance.

Assistance can be a combination of Pell grants, Stafford loans, PLUS loans, and/or work/study programs. Often completed through FAFSA online, the information on the application is input into a formula that estimates the components necessary to achieve sufficient financial assistance to meet higher education costs on an annual basis.

Like grant writing necessities, student and parent information should be clear, understandable, accurate, and sufficient to create an honest picture of the student’s financial position. Private and public scholarship awards should also be noted so the puzzle of college financing displays all the missing pieces to permit a successful financing plan to be created.

While there is no trick or mystery to completing a FAFSA, don’t be afraid to ask for help from education financing experts to complete and submit your FAFSA correctly. The goal is to obtain the necessary financing required to meet your higher education costs.

Why EFC is important to students and parents

EFC (expected family contribution) is a a critical – and sometimes feared – component of the student education aid equation. When students (or parents) make application for Federal student aid, an EFC is calculated.

Based on the student and parent financial situation at the time of application, the EFC will estimate the anticipated contribution level to be paid by the family.

As you might imagine, there is not always instant agreement between student/parent and the calculation made using Federal government standards. EFC is typically calculated based on information in a student’s FAFSA ( Free Application for Federal Student Aid).

However, some universities use the CSS (College Scholarship Service) Profile, which accomplishes the same goal. However, the CSS Profile application takes into consideration the value of equity in a home, which the FAFSA does not. This might have a major effect on increasing your EFC contribution.

An EFC is not a “bad” thing, but can sometimes cause apprehension and uncertainty. Its purpose is to identify the amount – on an annual basis – that a student or his/her parents can effectively contribute to higher education costs for the coming year.

These calculations are not intended to create a financial hardship on the student, but to allow the awards of Federal and university aid to be made fairly.

The difference between subsidized and unsubsidized loans

The terms subsidized and unsubsidized student loans are often confused and/or misunderstood, but the explanation is rather simple and easy to understand.

Neither term refers to or affects repayment during your active student years. Federal student loans do not require scheduled monthly payments during the period that the student is at least enrolled “half time” at an accredited college or university. Here are the primarily highlights showing the difference between these two loan types.

Subsidized loans:

• Have their accrued interest paid by the Federal government during the student’s university attendance.
• Are primarily granted based on documented need.

Unsubsidized loans:

• Accrue interest during university attendance and become part of the scheduled monthly payment when the student completes their education and joins the workforce.
• Do not require a documented “need” component.

Both loans still offer low interest rates and defer scheduled repayment terms until after the student has completed his/her education and is earning full time compensation. You’ll have the opportunity to consolidate your outstanding loans in the future to reduce multiple loan payment requirements to one affordable monthly amount.

If you qualify for a subsidized loan, your monthly payment will not include interest that was accrued (due) during your education years and deferral period.

Parent PLUS loan explained

Parent PLUS loans are different from classic Stafford education loans (made to students) because they are made to the parents of students. PLUS (originally an acronym for Parent Loan for Undergraduate Students) loans have different terms than Stafford, Perkins, and most ther available federally sponsored student loans. They also have some similarities.

For example, all are authorized by Title IV of the Higher Education Act of 1965. Stafford, Perkins, and PLUS loans are available through the Federal Direct Student Loan Program or through a variety of private student loan companies.

Like Stafford loans, they can be consolidated when the parent is ready to begin repayment after students complete their studies.

Their differences are significant. Unlike Stafford or Perkins, Parent PLUS loans are made to a student’s parents and repayment is the parents’ obligation, not the student’s. A Parent PLUS loan typically has higher interest rates, although still very reasonable, than other student education loans.

The most prominent difference involves the potential size of Parent PLUS loans. While Federal loans made to students have relatively low limits, Parent PLUS loans may be made for the entire cost of an education less other student loans, grants, and scholarships.

These loans often play a critical role in meeting post-secondary education expenses.

Student loan deferment provisions

The provision for student loan deferment is one of the most important provisions of Federal education financing. The simple explanation: As long as the student qualifies, primarily by being enrolled as at least a half time student in an accredited college, university, or other post-secondary school, no repayment of their outstanding student loans is required. Repayment is deferred until the student completes their studies or otherwise becomes ineligible for the guaranteed deferment.

A student who has not completed his/her studies, but is no longer actively enrolled as a practicing student, will normally lose their deferment and need to begin loan repayment. But, as long as the student remains enrolled as a half time student, at a minimum, their deferment is guaranteed by their loan terms.

There are actually a variety of different ways to defer student loans, depending on which category the borrower is in. There are five primary deferment categories. You may qualify for student loan deferment if you:

• Are a student (minimum half time enrollment);
• Are in a graduate fellowship program;
• Are unemployed;
• Are enduring a "qualified" economic hardship; or
• Are in a "qualified" rehabilitation training program.

The ability to defer student loans until you become a productive and compensated member of the workforce is one of the most important benefits of using federally approved education financing.

Combine this ability with low interest rates (sometimes subsidized by the government) and liberal repayment terms, and you see why Federal student loans are often the “engine” that drives the post-secondary education world.

Private student loans explained

Private student loans are similar to Federal student loans in many areas, but also have a few significant differences. They are called “private” (and sometimes “alternative loans”) because they are offered by independent lenders whose business is making student loans. They are not directly connected to the Federal government.

In recent years, there are many new student loans available, predominantly from private student loan companies. Their growth in the 21^st century has strongly outpaced Federal student loan growth – by an almost 4 to 1 ratio. Here is a brief overview.

• A standard FAFSA (Free Application for Federal Student Aid), required for all Federal student loans and sometimes a source of confusion for students and parents is sometimes not required.
• Loan proceeds are often given to the borrower, not directly to the student’s school, allowing you some discretion in their use.
• Although typically higher than Federal financing, interest rates offered are very competitive.
• Fast pre-approvals and timely closings are common.
• A grace period of up to 12 months after graduation is often available, providing a good window for borrowers to secure full time employment.
• Unlike most Federal financing, private student loans are subject to credit approval.

These are the primary differences from Federal student loans. Some appear to be positive, while others may prove a bit troubling. Needing a new student loan can be challenging anyway.

Private student loans serve an important purpose as a complement to Federal financing programs. New student loans provide the ability for otherwise financially challenged people to achieve their education goals.

Differences between private and Federal student loans

Private student loans look much like Federal student financing, but have some significant differences. It’s important to know the differences and accept them for what they are.

Independent lenders must operate like all other private businesses. They must offer products or services that are desired by consumers, and they must do so at a profit. Here are some important differences:

• Many private lenders do not require the submission of a FAFSA (Free Application for Federal Student Aid). Their application and its processing may (emphasize, “may”) be somewhat easier and simpler than with Federal student loans.
• A private student loan will typically have a higher interest rate than comparable Federal financing. Private lenders must build in reasonable profit and they tend to have a higher “cost of funds” necessary to make loans.
• There is no opportunity to receive a “subsidized” loan. A subsidized loan means that the Federal government will pay the interest that is due while the student is in school and the loan repayment is deferred. Private student loan companies cannot offer this feature, for obvious reasons.
• Often a new private student loan has fees that are not charged by Federal financing lenders.
• Repayment terms may not be as "flexible" as Federal student loans. New private student loans often offer fewer options for longer repayment periods.

Private student loans are an excellent alternative when Federal financing falls short in completing the puzzle of education cost requirements. You might pay a bit more, but you can borrow more and have more control over the use of your borrowed funds.

The benefits of private student loans

Private student loans generally award higher loan amounts than federal student loans and require a lot less paperwork. The amount awarded usually depends on your credit rating.

Even though private student loans are quickly catching up with the number of federal loans being disbursed, it’s still often a good idea to thoroughly utilize federal student loan opportunities first. Remember, grants and scholarships are rewards, not loans, and don’t have to be paid back. If there’s an opportunity for you to apply for a grant or scholarship, don’t hesitate.

Students generally must have top notch credit ratings and a worthy co-signer. Lenders will sometimes advertise lower rates for students while in school or in the grace period, with an increase in rates when the loan enters repayment.

If you’re not sure where to start, take yor time and compare various lenders as well as different options with each lender. You comparison should include loan amount, limits, rates, fees, and the term of the loan for best comparison. You can compare up to three possible loans at once with our, loan comparison calculator.

Finally, it’s important to understand that some private lenders offer assistance that can be applied toward things besides tuition including computer purchases and the costs incurred studying abroad. Keep this in mind if the need arises or you think you may need access to additional funds.

Private student loan qualifications

Most of the qualification criteria for Federal education financing continue when you apply for student loans from a private lender. The core issues are very similar.

• Students enrolled (or about to enroll) in qualified post-secondary schools are eligible. Unlike Federal loans, some private student financing is available for those attending non-accredited institutions and sometimes for those students not having at least a half time workload status.
• Students or parents may qualify as eligible borrowers.
• A student loan application from someone who is currently in default on other education loans will not qualify.

There are some qualification differences between Federal and private student loans that may prove significant. The most critical difference involves borrower credit. Federal student loans do not require credit score evaluation. When you apply for student loans from private sources, a credit check and examination will be done.

Private student loans, since they are made by independent lenders, need to be “underwritten” to ensure the creditworthiness of borrowers. While the credit restrictions are not overwhelming, this requirement sometimes affects your qualification for financing.

Since interest rates are a bit higher than Federal student loans, borrowers should have sufficient cash flow to project successful repayment after the deferment period ends. The good news: Most students and parents who qualify for Federal education financing should also qualify for private student loans.

Checklist to apply for private student loans

Your checklist to apply for a private student loan is basically identical to the one you need to complete an FAFSA (Free Application for Federal Student Aid).

In fact, many private student lenders will require you to submit an FAFSA, just as you would for a Federal student loan. An education loan decision is a bit more complicated with private student lenders as they must make a “credit decision,” which the Federal student loan programs often don’t require. Here is a checklist that should work for you.

You will need to assemble your data and documents in two “piles” to complete your checklist. Some information will apply to the student and some to the parents. This is normally true even if the loan is made to parents instead of students.

Student information typically required:

• Marital status
• Citizenship and residency
• Education history
• Major course of study and expected workload for the coming year
• Federal income taxes and deductions
• Spouse’s income (if you have one – spouse, not income)
• Assets and dependency status
• Household information
• School you’re enrolled in (or those you’re considering)

Parents’ data typically required:

• Education levels achieved
• Current income taxes and deductions
• Family assets
• Family member information
• Residency
• Age

As you might imagine, there is less consistency with private student loans than with most Federal education financing programs. Private lenders can make their own decisions regarding necessary application information, so refer to the specific instructions provided by the private loan sources you consider.

Also, remember that private student lenders typically require a credit report as part of their application and approval process.