Canton Repository

December 23, 2006

Students should lock in college loans early

By Paul M. Krawzak
Copley News Service

WASHINGTON Apply early.

That’s the key piece of advice experts have for high school seniors or college students who may need financial aid or a student loan next year.

Congressional Democratic leaders have identified reducing student loan interest rates — currently set at 6.8 percent or more — as among their top priorities for the next session of Congress. And there’s a good chance they will succeed, some Capitol Hill observers believe.

But students should not wait for a lower interest rate to be signed into law before applying for financial aid or a loan, according to student aid directors and industry insiders.

That’s because the interest rates that students pay on loans is based on when they receive the money, not when they apply for it.

If loan rates are reduced before the next full academic term, which begins around September, students who receive the loan proceeds at that time will pay the lower interest rate.

In short, there is no downside to applying early. But there are drawbacks to applying late.

The next several weeks will mark the year’s heaviest traffic in student financial aid applications.

Jan. 1 is the earliest that students can submit the Free Application for Federal Student Aid, or FAFSA, a form used by most two- and four-year colleges and universities for awarding federal student aid and most state and college aid.

Financial aid administrators advise students to submit the forms as soon as possible after Jan. 1 to meet varying college and university deadlines that fall early in the year.


“We encourage students to apply early,” said Michele Wade, associate director of financial aid at Ohio State University. The earlier students apply, the less likely they are to lose out on sources of aid with early application deadlines, she said.

Both the federal government and institutions of higher learning use the FAFSA to determine how much aid, including subsidized student loans, a student may qualify for, based on financial need and the cost of tuition and other expenses.

Students who submit the FAFSA early in the year typically receive information around April on their eligibility for financial aid from colleges to which they have applied.

The most common type of student loan is the Stafford loan, which has a fixed 6.8 percent interest rate. It is available in a subsidized form for students who demonstrate financial need and an unsubsidized form for those who do not.

The federal government is responsible for the interest on subsidized Stafford loans until the recipient begins to pay off the loan, typically within six months after graduating or withdrawing from a required course load.

Students who have unsubsidized loans are responsible for paying all the interest.

Stafford loans also are divided into direct student loans provided by the government, and loans available from private lenders through the Federal Family Education Loan program, or FFEL.

Another common type of loan is the PLUS, which is available to parents of dependent students and, as of July 1, 2006, graduate and professional students. PLUS loans are not based on financial need.

PLUS direct student loans have a 7.9 percent interest rate. PLUS loans available from private lenders through the FFEL program have an 8.5 percent interest rate.

Other federal loans and private loans backed by the government are also available to students.


Experts advise students to exhaust other forms of financial aid, such as scholarships, grants and part-time work, before seeking a loan. They recommend comparing loans carefully, since some carry incentives such as lower interest rates or waiving of origination fees for students who pay on time.

“Make sure that you borrow conservatively,” said Amy Baker, director of financial aid at Stark State College of Technology in Jackson Township. “Do a budget.”

She said a “lot of students just borrow the maximum because they can.” She advises against that.

Wade at Ohio State urges students who need to take out a loan to seek a Stafford first, since it has the lowest interest rate.

The next option to consider is a PLUS loan, she said. But in some cases, she added, other alternatives, such as home equity loans, could have lower borrowing fees or tax advantages.

When students compare loans offered by private lenders, they should recognize that advertised rates apply to the most credit-worthy borrowers — and may not apply to them.