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Student Loans: Legal Information You Should Know

As college enrollment and tuitions continue to increase, so does the popularity of student loans. While they help extend opportunities to those who otherwise couldn't afford college, they also present a significant financial risk. In theory, a student who takes out a loan to pay for tuition and other expenses will graduate with a degree that can be used to get a job that pays well enough to repay the loan. But there is a wide variance of often-confusing student loan terms among the various lenders (especially private lenders) and graduating with a degree does not necessarily guarantee the ability to find a good job and repay the loan.

This article provides an overview of the main types of student loans, the process for handling a billing dispute or other loan problems, student loan deferment, and more.

Federal vs. Private Student Loans: The Basics

Student loans are issued by either the federal government, the school (and backed by the federal government), or a private lender. Generally speaking, federally procured loans have lower rates and more flexible repayment options, while private loans (though usually more expensive) offer additional options for borrowers. Since federal loans typically have better terms, it makes sense to start there and see what's available before shopping for private loans.

The interest rates are almost always lower for federal loans than for private loans and are fixed at one rate throughout the life of the loan. Private lenders sometimes offer lower rates, but only for variable interest rate loans that rise in accordance with broader interest rate hikes. Also, most private loans require a co-signer since student borrowers typically don't have much of a credit history and are considered risky.

Federal lenders also offer a wider variety of repayment options than their private counterparts, which are not required to alter repayment terms for borrowers whose circumstances have changed. For instance, federal lenders allow borrowers to base their payments on their income, while private lenders may offer the same, but are not required to do so.

Types of Federal Student Loans

The U.S. Department of Education (ED) provides a great deal of student loan information on its website, including comparison charts and FAQs. There are three main types of loans provided directly by the federal government, in addition to the indirect Federal Perkins Loan Program (in which the school is the lender), all with their own terms and criteria. The first step when applying for federal aid is to complete the Free Application for Federal Student Aid (FAFSA).

Basic loan information and amounts are listed below:

  General Loan Information Annual Award (as of October 2015)
Federal Perkins Loan

Available to both undergraduate and graduate students

Eligibility based on financial need

Interest: 5%

Up to $5,500 per year for undergrads (total not to exceed $27,500)

Up to $8,000 per year for graduate students (total not to exceed $60,000)

Direct Subsidized Stafford Loan

Available to undergrads only

Eligibility based on financial need

Interest: 4.29% for loans disbursed between 7/1/15 and 7/1/16

$3,500 to $5,500, based on grade level (total not to exceed $23,000)

May receive Direct Subsidized Loans for a total of 150% of the program's ideal length (for example, up to 6 years for a typical 4-year program)

Direct Unsubsidized Stafford Loan

Available to both undergraduate and graduate students

Proof of financial need not required

Interest: 4.29% for undergrads and 5.84% for graduate students (for loans disbursed between 7/1/15 and 7/1/16)

$5,500 to $20,500, based on grade level and dependency status

For undergrads, total not to exceed $31,000 for dependent students, or $57,000 for independent students

For graduate students, total not to exceed $138,5000 for independent students (not available for dependent graduate students)

 

Direct PLUS Loan

Available to the parents of dependent undergrads and (independent) graduate students

Proof of financial need not required

Borrower must not have a negative credit history and is responsible for interest during all periods

Interest: 6.84% for loans disbursed between 7/1/15 and 7/1/16

No minimum amount; maximum amount is the cost of attending the institution (including tuition, room and board, etc.), minus other financial aid received

Private Student Loans

Private student loans are provided by banks or credit unions and vary quite a bit from lender to lender. While all federal loans must follow certain rules and procedures, private lenders have much more leeway and typically do not offer flexible repayment options. But while federal lenders may garnish your tax refund or Social Security benefits if you default, private lenders must first get a court judgment before garnishing your wages. Eligibility for private loans typically is based on the credit score of you and/or your co-signer.

Below are some examples of private student loans:

  • Discover (Bank) Law Loan - Available to law school students; minimum 6.15% fixed interest rate; separate Discover Bar Exam Loans also are available at a minimum 6.49% fixed interest rate
  • Wells Fargo Collegiate Student Loan - Available to undergrads in 4-year programs; no payments until 6 months after leaving school; variable interest rates ranging from 3.17% to 8.60%
  • Citizens Bank MBA Student Loan - Available for graduate students pursuing an MBA; variable interest rate as low as 2.69%; either five-year, 10-year, or 15-year repayment terms

While federal loans are fairly standardized, make sure you fully understand the terms of a private student loan before signing on the dotted line.

Who to Contact if You Have a Student Loan Problem

If you are having problems with your student loan, such as a dispute over billing, you may call either the FSA Ombudsman within the ED (for federal loans) or the Private Student Loan Ombudsman within the Consumer Financial Protection Bureau. The FSA Ombudsman does not have the authority to impose any solutions, but will work with everyone involved in order to resolve the issue. The Private Student Loan Ombudsman also lacks direct authority but can answer questions about confusing loan terms, debt collection problems, billing disputes, and other issues.

The American Bar Association also provides helpful student loan information at SafeBorrowing.com.

Deferment and Forbearance: Overview

There may be times when you need to take a break from making student loan payments, such as periods of unemployment or other setbacks. If you have trouble making payments, you should ask your lender for a deferment or -- if you don't qualify for a deferment -- a forbearance. They are similar in that they allow you to reduce or postpone your payments, but have some key differences:

  • Deferment - You will not need to make payments during the deferment period and the federal government may pay the interest on the loan (unless it is an unsubsidized or PLUS loan)
  • Forbearance - You may either stop making payments or make reduced payments (depending on the agreement reached with the lender) for up to 12 months; interest will continue to accrue during the forbearance period

Whatever the reason, make sure you contact your lender as soon as you run into problems. Lenders will often agree to a deferment, forbearance, or other modification and always prefer that to a default, but delays will not help your cause. Talk to a consumer protection lawyer in your area if you need legal assistance.

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