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Understanding Student Loans

Education loans create opportunities for students to afford post-secondary education. The two main types of loans are: federal loans and private loans. Federal loans are made and backed by the government with fixed interest rates, income-driven repayment plans but also origination fees. Private loans are made and backed by banks, credit unions or state-based organizations with terms and conditions set by the lender  Both types of loans require completion of the Free Application for Federal Student Aid (FAFSA) annually and a review of your financial need by your college in order to be eligible for loan, grants and any other need-based aid provide at the local, state or federal level.  

Federal Student Aid Identification (FSA ID)

FSA ID is the username and password you use on federal student aid websites to complete the FAFSA, manage your student loans, and access information on the myStudentAid mobile app. The FSA ID is used to confirm your identity when accessing your financial aid information and to electronically sign your student aid documents. If you forget your user name, FSA can send you an email code or text to your mobile phone, or you can answer your challenge questions. 

If you are a dependent student, both the borrower and the parent/guardian will need to have separate FSA ID's. In order to avoid financial aid and student loan scams, take care not to share your FSA ID with anyone other than Federal Student Aid or your loan servicer. 

Federal Loans

The Federal Student Loan Program (PDF) was created to help cover the cost of a college education. For new loan borrowers, the main types of federal student loans are:

  • Direct Subsidized Loans are available to undergraduate students who demonstrate financial need and offer the benefit of having the federal government pay the interest while the loan is in a period of deferment or grace period.
  • Direct Unsubsidized Loans are available to undergraduate and graduate students and do not require financial need in order to be eligible for them. This type of loan accrues interest while the loan is in deferment.
  • Direct PLUS Graduate Loans are available to graduate or professional students to help pay for educational expenses not covered by financial aid. This type of loan accrues interest while the loan is in deferment.
  • Direct Parent PLUS Loans are available to parents of dependent undergraduate student to help pay for educational expenses not covered by financial aid. This type of loan accrues interest while the loan is in deferment. 
  • Direct Consolidation Loans provide the opportunity to combine all eligible federal loans into a single loan. This type of loan accrues interest while the loan is in deferment.
  • The Federal Perkins Loan Program provided undergraduate and graduate students low interest loans. The program expired in September 2017.
  • Family Federal Education Loan (FFEL) Program provided loans to undergraduate and graduate students and expired in July 2010. Borrowers have the option of consolidating these loans into a Direct Consolidation Loan.

Federal versus Private Loans

Borrowers who are eligible for federal loans should consider taking them out before taking out private loans. Both types of loans require repayment with interest, but federal loans tend to have lower interest rates, more repayment options and opportunities for loan forgiveness. The Federal Student AID (FSA) website provides a summary chart of the differences between federal student, federal parent and private loans

Documentation Requirements

In order to be eligible for federal loans, a borrower must complete the FAFSA, which as specific eligibility requirements and documentation requirements. FSA provides a list of documents needed in order to fill out the FAFSA. For dependent students, additional documents are required. 

Entrance Counseling and Master Promissory Note

Once you have made the decision to take out Direct Subsidized or Direct Unsubsidized Loan, you will be required to complete Entrance Counseling before funds are disbursed. Your school will let you know how to complete entrance counseling, either in-person or online. FSA provides an Entrance Counseling Guide (PDF) to give you an overview of the repayment process. The purpose of the counseling is to make sure you understand the terms and conditions of your loan that are spelled out in the Master Promissory Note (MPN), along with additional information about how to manage your education expenses. The MPN is a legal document that binds you to repaying your student loans. It provides information about your interest rate, available repayment plans, and deferment or cancellation options. You only sign one MPN even if you take out multiple loans over time, so review the details carefully. The conditions are binding, even if you don't finish your degree or you cannot find a job after you leave school.  

National Student Loan Data System (NSLDS)

NSLDS is the U.S. Department of Education's central database for student aid. The database receives information from multiple sources in order to provide you with a centralized view of your loans and grants. Your loan servicer pulls information from NSLDS in order to manage your student loan account, so if there is any discrepancy between the two systems, contact your loan servicer immediately. You will need your FSA ID in order to gain access to NSLDS.

Consumer Federal Protection Bureau (CFPB) 

Borrowers who have concerns about how their private loans are being handled by their bank or credit union have the option of filing a complaint with the CFPB.  They offer an online complaint process. During Step One, select "Student Loan" and "Private Student Loan" to begin the process. 

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