Consumer Protection Topics - Student Loans
Student Loans Basics
Going to school can be expensive. Many students and their families use federal or private student loans to help pay for education after high school.
Federal student loans come from the Department of Education. These include:
- Direct Subsidized Loans – made to eligible students who demonstrate a financial need to help cover the costs of school;
- Direct Unsubsidized Loans – made to eligible students regardless of their financial need;
- Direct PLUS Loans – made to graduate and professional students as well as parents of dependent undergraduate students to assist with paying for costs not covered by other financial aid;
- Direct Consolidation Loans – allow students to combine all of their eligible federal student loans into one loan with one loan servicer; and,
- Perkins Loans – made by schools to students with exceptional financial need.
These loans offer important benefits. For example, if you have a Direct Subsidized Loan, the federal government will pay the interest on the loan while you are in school. In addition, the interest rates on federal loans typically are fixed, meaning you will not be surprised by a potential increase in your loan’s interest rate. Federal loans also allow you to make payments based on your income, defer payments under certain circumstances (such as if you go back to school), and may be forgiven after ten years if you pursue a career in public service.
Private student loans are made by a lender, such as a bank, credit union, or other financial institution. Generally, the lender will consider several factors when reviewing your application for private student loans, including your credit history and whether you have a co-signor. Private loans offer variable interest rates, so the interest rate may rise during the life of the loan. These loans also often have fewer options to reduce or postpone payments and less flexible payment options.
Consumer Protections Available
Many consumer protection laws apply to student loans. Some of these include:
- Lenders must show you the cost of credit as a dollar amount and an annual percentage rate (APR) and also disclose terms in a meaningful and uniform manner.
- Debt collectors may not use abusive, unfair, or deceptive practices to collect money from you.
- Your lender, servicer, or debt collector must provide accurate information to credit reporting agencies. Credit reporting agencies must also report accurate information to you. Once per year, you may request a free copy of your credit report from each agency by telephone, mail, or at annualcreditreport.com.
- Your lender may not discriminate in any aspect of a credit transaction based on race, religion, national origin, sex, marital status, age, whether you receive public assistance, or whether you exercise your rights under the Consumer Credit Protection Act.
- Schools must allow you to choose how you want to receive any financial aid, which may include federal student loans, that is over and above tuition and fees paid directly to the school. (These amounts are called credit balances and are generally used to pay for living expenses.) If a school delivers funds to you electronically using a debit or prepaid card, it must limit the fees you can be charged for balance inquiries and ATM access.
If you are in school or plan to be in school:
- Complete the Free Application for Federal Student Aid (FAFSA). Visit fafsa.gov to find the deadline for applying and to complete your application. You must complete the FAFSA to qualify for federal and state grants, loans, and work study.
- Calculate how much you need to borrow and determine what your monthly payment will be. Your anticipated costs (tuition, textbooks, housing, food, transportation) minus your education savings, family contributions, income from work-study or a job, scholarships and/or grants will help determine how much you may need. Even if you are approved for a larger loan, limit what you borrow in order to limit your future monthly payment.
- Keep track of the total amount you have borrowed and consider reducing it. For example, if your loan accrues interest while you are in school, you may be able to make interest payments while you are still enrolled. This can reduce how much you pay overall. You could also repay some of the principal (the amount borrowed) before the repayment period officially begins.
If you are out of school:
- Visit the Department of Education’s National Student Loan Data System to determine what type of federal loans you hold, how much you owe, and what entity services your loans.
- See if you are eligible to make reduced payments based on your income. The Department of Education offers a Repayment Estimator that can help you to determine if you are eligible, as well as complete information on income-driven repayment plans.
- Determine if you qualify for loan forgiveness, cancellation or discharge. You may be eligible for forgiveness after a number of payments if you are a teacher, if you work in certain public service professions, or if your school closes while you are enrolled. Visit the Department of Education’s Loan Forgiveness page for more information.
- Make your loan payments on time. Student loans are typically reported to credit bureaus, so paying on time can help build a good credit history, and paying late can harm your credit history. To help you stay on schedule, consider having your payments automatically deducted from your bank account or arranging for e-mail or text-message reminders.
- Look into refinancing opportunities. You may be able to obtain a lower interest rate and even consolidate multiple loans of the same type into one loan. However, be aware that if you refinance a federal loan into either a private loan or into a different kind of federal loan, you may lose important benefits (such as loan forgiveness for entering public service).