Latrac Education

First it was raising the interest rate, now student loans backed by the federal government are changing how they loan out the money. The old student loan program, the Federal Family Education Loan Program (FFELP) required students to borrow money from an actual bank, and the bank was reimbursed from the federal government. It was a mess. Interest rates were all over the place and banks could sell the loan to other banks, adding further confusion to student borrowers.

Today’s new student loan system, the Federal Direct Loan system, is streamlined for students’ protection. Student loans are now going through the federal government directly, without a bank’s involvement. One tradeoff is a higher interest rate than students saw in the early 2000s, but this interest rate is fixed and won’t fluctuate higher when economic conditions change. Once students graduate, they still have the power to consolidate their student loans with another company for a lower interest rate.

Right now everyone is in a transition period, and any current students with loans in the old FFELP system need to visit their school’s Financial Aid office immediately. The financial aid officer will help the student sign a new Federal Direct Loan Master Promissory Note, which makes sure your federally funded student loans come in correctly next semester. Students who have already graduated, or who will not receive federal student loan monies in the future will not need to sign a new master promissory note. A master promissory note is the legal document you sign acknowledging the student loan is yours and your intent to repay it without defaulting on the loan.

New students should still fill out a Free Application for Federal Student Aid (FAFSA) as soon as they know their tax information and their parents’ tax information (if still a dependent). The FAFSA doesn’t just qualify the student for loans, but also federal and state grants, and need-based financial aid unique to the college or university attended. Before you file your FAFSA you should have your final school list fairly narrowed down.

Regardless of your federal loan status, you should visit your schools financial aid office once a semester if you receive any kind of scholarship or loan. They have information on new financial aid options, and you can make sure your class registration isn’t held up from a snafu in your award status.

Here’s another tip, keep an eye on your credit hours. The federal student loan program prescribes the amount available for borrowing based upon a student’s credit hour status. The thought is the more credit hours a student has completed, the more likely he or she will finish school and not default on the loan. Therefore, someone with Freshman status can borrow less money than someone with Sophomore status. If you took college classes in high school, or over the summer session, and your class status has changed, let your financial aid officer know. By borrowing more money on your federal student loan you might be able to reduce your work hours or other financial strains so you can focus more on getting good grades, not how you will pay your tuition.