First it was raising the interest rate, now federally backed student loans are changing the way money is lent. The old student loan program, the Federal Family Education Loan Program (FFELP), required students to borrow money from a real bank, and the bank was repaid by the federal government. It was a disaster. Interest rates were all over the place and banks could sell the loan to other banks, adding more confusion to student borrowers.
Today’s new student loan system, the federal direct loan system, is streamlined to protect students. Student loans now go directly through the federal government, without the involvement of a bank. One trade-off is a higher interest rate than what students saw in the early 2000s, but this interest rate is fixed and will not fluctuate further 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 student with loans in the old FFELP system should visit their school’s financial aid office immediately. The financial aid officer will help the student sign a new Federal Direct Master Loan Promissory Note, which guarantees that their federally funded student loans arrive correctly next semester. Students who have already graduated or will not receive federal student loan money in the future will not need to sign a new master promissory note. A master promissory note is the legal document you sign acknowledging that the student loan is yours and your intent to repay it without defaulting on the loan.
New students should still complete a Free Application for Federal Student Aid (FAFSA) as soon as they know their tax information and their parents’ tax information (if they are still dependents). The FAFSA not only qualifies a student for loans, but also for federal and state grants, and need-based financial aid unique to the college or university attended. Before submitting your FAFSA, you should have your final list of schools fairly narrowed down.
Regardless of your federal loan status, you should visit your school’s financial aid office once a semester if you receive any type of scholarship or loan. They have information about new financial aid options, and can make sure your class registration isn’t delayed due to an error 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 loans based on the student’s credit hour status. The idea is that the more credit hours a student has completed, the more likely they are to 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 during the summer session, and your class status has changed, please let your financial aid officer know. By borrowing more money from her federal student loan, she may be able to reduce her work hours or other financial stresses so she can focus more on getting good grades, not how she’ll pay her tuition.
