filed under: Student Loans
Unlike a grant or scholarship, you have to repay a student loan. Student loans can be issued to either you or your parents. A Stafford loan is a federal loan program that is made directly to the student. Stafford loans come in two types: subsidized and unsubsidized.
Stafford loans are loans guaranteed by the federal government that are disbursed by a bank or other private lender that participates in the Federal Family Education Loan Program (FFELP). The government may disburse the loan directly through the Federal Direct Student Loan Program (FDSLP).
A subsidized loan is a loan whose interest is paid by the federal government. An unsubsidized loan is one where you pay the interest on the loan. Since a subsidized loan is clearly the better deal, eligibility rules for these loans are much stricter than for unsubsidized loans. In order to be eligible for either type of Stafford loan, you must complete a Free Application for Federal Student Aid (FAFSA).
For the 2005-2006 academic year, first-year students who are dependent on their parents' support can borrow up to $2,625 in Stafford loans. If they are independent of their parents, they can borrow up to $6,625 in their first year. Second-year borrowing limits increase to $3,500 and $7,500, respectively. Third- and fourth-year borrowing limits increase to $5,500 and $10,500, respectively.
For students enrolled in an undergraduate program and dependent on parents for financial support, the current total borrowing limit for Stafford loans is $23,000. If they are independent of their parents, the current total borrowing limit is $46,000.
However, the ceiling on borrowing limits should not be a license to borrow all that you can. Other sources of income, including part-time work and sticking to a personal budget, can reduce the amount you need to borrow for college.
At 8% interest and $25,000 in student loans, a monthly payment for a five-year loan repayment plan is $507. If you extend the repayment plan to 10 years, you owe monthly payments of $303.
After you graduate, your lender gives you a grace period before you have to start repaying the loan. A grace period is typically six to nine months long. You may also be eligible for a loan deferment. A loan deferment is a temporary suspension of loan payments -- it is not debt forgiveness. Federal government service may be one potential reason for seeking a loan deferment.
If you experience a financial hardship during the repayment period, you can also request forbearance from your lender. Forbearance is temporary relief from making loan payments, often due to the loss of a job or similar financial duress. During the time that you receive forbearance, your interest expense is capitalized, or added to the amount you owe.
When you begin to repay a student loan, you owe accrued interest together with any capitalized interest. As a result, some of your early payments are applied entirely to interest with no reduction in loan principal. You should check with your lender on how your payments are applied to principal and interest. Monthly payments are often calculated for a specific repayment period such as 10 years. If you make extra or larger loan payments, or either skip or make smaller payments, your loan period is likely to be different from 10 years.
The interest rate that you pay on a Stafford loan is reset every July 1. For the year that began on July 1, 2005, the interest rate is 4.7% for students either in school or in a grace period. For students who are repaying loans, the current interest rate is 5.3%. There is a lifetime cap of 8.25% on the interest rate for Stafford loans.
The interest rate on Stafford loans is calculated by adding a margin, or spread, to the base rate. The base rate for Stafford loans is the yield on the 91-day (3-month) Treasury bill.
The margin steps up for students who are in the loan-repayment period. For example, if you borrowed a Stafford loan since 1998, the interest rate this year is the three-month T-bill yield plus 1.7%. That works out to 4.7%. Students repaying the same loan are charged a margin of 2.3% instead, which increases the loan rate by 60 basis points to 5.3%. Other information about Stafford loans includes:
Additional loan amounts for graduate students. Graduate students can borrow up to a total of $65,500 and $138,500 for subsidized and unsubsidized loans, respectively. Graduate students can borrow up to $18,500 in a year, less any amounts for subsidized loans.
Interest-rate margins are higher for older Stafford loans. Margins on student loans made prior to July 1, 1998 are generally higher than those made in the past few years. For example, in the three years prior to July 1, 1998, the margin is 2.5% for students still in school and 3.1% if repaying a loan. Current interest rates on these older loans work out to 5.5% and 6.1%, respectively.
It's important to keep in mind that you or your child may have more than one student loan. As a result, the types of loans and interest rates are likely to be different. When it comes time to repay those student loans, you may wish to consolidate them using a federal consolidation loan or other consolidation loan.
As a result of the 2001 tax law, you can take a deduction for interest expense paid on student loans over the entire loan term. (Previously, you were limited to taking a deduction during the first 60 months of the loan term.)
The new tax law also increases the income limits for taking this deduction. In 2006, For taxpayers filing a single return, your allowable deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $50,000. The allowable student-interest deduction phases out completely when your MAGI reaches $65,000. For married taxpayers filing a joint return, the increased income limits are $100,000 and $130,000, respectively for 2006.
To take a student loan interest deduction, enter the amount of the deduction on line 33 of IRS Form 1040.
If your income falls within the income limits shown above, see IRS Pub. 970 to calculate a partial deduction.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.