What is a financial aid loan? Financial aid exists to help college students fund their undergraduate or graduate degree studies. Loans eventually have to be repaid by the parent or child, depending on the type of loan. By contrast, scholarships and grants do not. Nearly 45 percent of all undergraduate students finance part of their education with student loans. Not surprisingly, the percentage is even higher for those students pursuing advanced degrees--more than 50 percent of all graduate students and 75 percent of all professional students borrow money to attend school. Most student loans are guaranteed by the federal government, which means that the government will reimburse your lender if you default on your loans. Since the 1970s, the amount of student loans guaranteed by the federal government has been increasing steadily. Are there different types of student loans?
Yes. The world of student loans is often complex because of the variety of loan types and lenders on the scene. The system of student loans depends on a network of money-lending institutions (banks) and other unique institutions such as guarantee agencies, student loans servicers, colleges, state agencies, and, of course, the federal government. Federal student loans
The federal government is the largest provider of student loans. Under the William D. Ford Federal Direct Loan program, the federal government began issuing federal student loans along with financial institutions. Before 1994, all federal student loans were issued only by private financial institutions. The result is that today your federal student loan may be a direct loan (issued by the federal government) or an institutional loan (issued by a financial institution under the Federal Family Education Loan Program). It is expected that the federal government will eventually make 60 percent of all federal student loans. Despite a strong foothold in the student loan arena, the federal government's loan programs change often, depending on the overall health of the economy and other social and fiscal policies. If what is black and white today may be gray tomorrow, it is important to keep informed of such changes, especially when your child is at or near college age. To apply for any of the federal student loans, you will need to fill out the federal government's Free Application for Federal Student Aid form (FAFSA) (see the discussion Applying for Financial Aid). For more information on the specific types of federal student loan programs (including interest rates, borrowing limits, and repayment terms), see the discussion Federal Student Loans. Private student loans
Private lenders are the second-largest providers of student loans after the federal government. Private student loans are made by financial institutions directly to students without any involvement by the federal government. Private student loans differ from the institutional loans discussed above in that they are not guaranteed by the federal government: The bank gets stuck with the loan if you don't repay it. However, private student loans are closely linked to federal student loans. For example, many graduate students (and some undergraduates) can use one application package to apply for both federal student loans and private student loans. To apply for private student loans, you will need to complete the appropriate lender application (if any) and perhaps the federal government's FAFSA. Check with your lender. For more information on the specific types of private loan programs, see the discussion Private Student Loans. State student loans
Every state has its own agency dedicated to higher education, and most states offer a variety of student loan programs. To apply for state student loan programs, you must complete the appropriate state application. Also, you'll likely be required to submit the federal government's FAFSA. For more information on state loan programs for higher education, see the discussion on State Student Loans.
College student loans
Like the states, many schools have their own loan programs. As you might expect, college loan programs (if your college even offers one) vary regarding the interest rate, borrowing limits, repayment terms, and other provisions. To apply for college student loans, check with the particular college to learn what forms are required. Most colleges use the PROFILE form, a standard financial aid application put out by the College Scholarship Service. Others use an individualized institutional form. In addition, it is likely you will be required to submit the federal government's FAFSA. How do I know who holds my student loans?
The institution that lent you the money may not be the same institution that now holds your student loans. Loans are frequently passed from one institution to another. Such a system may be frustrating when it's time to repay your student loans because you must keep track of where to send your payments. Your student loans may be held by one of the four following entities: Lenders Assuming your student loans are not in default, they may be held by one of four types of lenders:
- Private lender (bank, savings and loan association, credit union)
- Federal government (most likely the Department of Education but sometimes the Department of Health and Human Services)
- Colleges
- State student loan agency
If your loan is in default, chances are the lender will pass it on to either a collection agency or a guarantee agency (discussed below). Companies on the secondary market
The secondary market consists of financial companies. The secondary market is where lenders sell loans that are not in default if, for business reasons, they don't want to collect the loans themselves. It is not required for a lender to get your permission before selling your loan on the secondary market; however, the lender should notify you so you will know where to send your payments. Nearly 30 different companies exist on the secondary market to buy student loans. One of the biggest is the Student Loan Marketing Association, commonly known as Sallie Mae.
Loan servicers
A loan servicer is a company hired either by your lender or a company on the secondary market to collect your loan (assuming you have not defaulted). The loan servicer receives and processes your loan payments, examines deferment or cancellation requests, and otherwise handles all correspondence. The Student Loan Servicing Center is an example of a loan servicer.
Guarantee agencies
Federal student loans are mostly administered through state or private nonprofit agencies called guarantee agencies. A guarantee agency is like an insurance company--it insures your loans and pays off the holder of the loans if you don't pay. Most loans are sold to a guarantee agency by the original lender or by the secondary market company that bought the loan.
One of the guarantee agency's primary purposes is to collect student loans
that are in default. Consequently, most--though not all--student loans that
are in default are with guarantee agencies. All 50 states have a guarantee
agency, but some do not collect student loans. In these states, collection
activities are usually handled by a different state's guarantee agency or a
private guarantee agency.
FAFSA Application | 