Federal Family Education Loans: What to Watch Out For

Federal family education loans are administered through the Federal Family Education Loan, or FFEL, program and make up the largest government-backed source of financial aid for college. The benefits are many including less stringent qualifying criteria than conventional loans, interest rates that often are below market, deferred payment options that don't start until you leave school and flexible repayment options, particularly if you fall on hard economic times. But there also are factors you should watch out for.

These are Government-Regulated Programs

Federal family education loans are unique in that they are a public-private partnership. The government agrees to subsidize and guarantee loans made through private lenders. While the private-lender component brings competition to servicing the loans, all the lending criteria are set by Congress. This means the terms of the program can change. If you receive a loan through the FFEL program, the terms will not change mid-stream. However, if you are considering applying for these federal family education loans, the program specifics can change with each new budget Congress passes, which can affect interest rates, repayment criteria and eligibility.

A Public-Private Partnership

The government-backed nature of these loans allows private lenders to offer interest rates that often are below market. This is particularly true if you have no or limited credit history. It is possible to qualify for FFEL funds at a rate no private sector lender would offer you outside of the program. But remember, you will be dealing with a private institution. You are establishing a credit history with this loan debt. Many factors can affect your ability to repay, and federal family education loans have options in this area. But before taking any loan, you need to evaluate your ability to repay it and maintain or establish a good credit history.

Interest Rates

The interest rates on federal family education loans are set by Congress and can change. Congress typically sets rates that change each year of your loan, so that the interest on the loan during your first year of schooling might be higher than second-year interest. However, Congress also can change that and has done so in the past. Again, this won't affect a loan you have already received, but if you are considering applying now, any change to the interest rate structure in the FFEL program could impact the total amount you will owe when you leave school.

Upfront Fees

Regulations governing federal family education loans allow the private-sector lenders to charge an upfront fee, which is typically 2 percent, with the lender responsible for a portion of that. This helps offset the cost of handling higher-risk, lower-rate loans. In many cases, because this is a competitive program with the private-sector component, the lender will absorb all the fee. However, this is not required. Be certain you know what the fees are, as they are typically rolled into your loan and affect the total amount you pay.

Lending Limits

Federal family education loans come in four types from three government programs including subsidized and unsubsidized Stafford Loans; the PLUS, or Parent Loan for Undergraduate Student, program; and consolidation loans. Each of these loans has maximum limits per loan. Some limits change depending on your year in school. All the limits change as Congress reviews and revises the programs. Before counting on FFEL program funding, know the total amount you will need to meet college expenses. You might have to seek additional financing sources.

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