Why take a Federal Loan?

Shocking statistics from the 2006-2007 school year may have some future college students wondering why they should take the chance on securing federal funding from a lender recommended by the financial aid advisor of their school. The Education Department officials released findings that out of 921 colleges and universities, there were an unbelievable 80% that had their federal student loans secured through a single lending institution.

The Undersecretary of the Education Department does not feel there is need to be concerned for the coming years. The 2007-2008 school year has been monitored with much higher standards in place. Each school must provide a list of recommended lenders to their students, with reasons for the top three lenders as choices. Those three cannot be affiliated with one another or the school in any way. This will help to strengthen the competition between the lending institutions to offer the best terms for borrowers.

The basic reasons to choose a Federal Loan over a private loan remain the same. The interest rates on principal balances are regulated by the federal government, and remain the best deal available for college-bound students. The payoff terms are also the best out there, because of the many different options available.

Payoff options begin with the securing of the loan. The loans have no payments due until the student has completed their degree, or falls below half-time status for 6 months. This leaves room for graduates to find a job and get established before needing to begin payments. For other loans, like private loans or PLUS loans taken on by parents, the repayment period begins as soon as the money is released from the lender.

Then the option to defer the loan repayments becomes available as well. If by chance the student is not able to find a job right away, or has another outstanding circumstance that affects their ability to pay, there is an application to defer payments for up to a year. If payments are not received right away for a private loan company, they can begin to deduct from your credit score. They can also resort to a collections company to attempt to get their money back.

There is also the option to restructure the payments based on your income. If you can pay some, just not the monthly amount determined, there is the possibility to reduce the payments for a while, and then add the remaining amount to the principal balance owed.
At the end of the original payment period, then, there will be a few extra payments due. This allows the borrower time to get their finances in order, without the negative affects on their credit score.

Compounding interest is the last big benefit to the Federal loan. The interest on a private loan can be compounded (calculated and added to the principal balance) as often as every month in some cases. Federal Loans are generally compounded just once a year, and at a lower rate. Borrowers also have the option to pay down the interest during school, and then repay the balance after school is finished, thus lowering the number of times the interest is compounded, and the overall amount repaid.

In all, federally funded loans are the best way to go. The recent discovery of some lenders not behaving in a student-focused manner is not evidence of the entire process. The lenders still operating are easy to work with, and are focused on the needs of the student first. Check with the financial aid advisors at your school, and research the recommendations online. You are sure to find a lender that will look out for your interests without depleting your bank account.