Nearly two thirds of undergraduate students will finish school with some debt – an average of $19,300. Graduate and professional students will have even more debt, and these figures are rising by 3% each year.

We know that it can be daunting to choose between the various types of student loans available. You need to know how the loan process works and what your options are. Below we provide information regarding the differences between federal and private loans, what the components of a loan are and repayment information.

Federal vs. Private Loans

All student loans fall into two main categories: federal and private loans. Both types can be secured from private financial aid companies such as MyRichUncle. Federal loans are guaranteed

Guaranteed Loan

The government provides lenders a guarantee on federal student loans, so that should a student default on his or her federal loan agreement, the government repays the loan at the expense of taxpayers. The student must still pay back the debt to a collection agency, usually with penalty fees. Contact your lender immediately if you believe you will not be able to make payments on your federal loan obligation and they can assist you with learning about forbearance options.

by the federal government, so because of this reduced risk, federal loans typically have lower interest rates.

Interest Rate

This is the cost of the loan, and can be a fixed or variable amount. For most loans, interest begins accumulating immediately, before graduation. Your repayment schedule will determine how much of each payment goes toward interest, and how much goes toward the principal amount borrowed. Some repayment options allow you to pay off the loan interest while still in school, which will lower your total repayment amount.

You should obtain federal loans before considering a private student loan. File the FAFSA form early as it determines your eligibility for federal aid, as well as many other types of state and institutional aid.

Many families find that the federal loans they secure are insufficient school expenses

School Expenses

Often called the Cost Of Attendance (COA). This is an estimate of the total amount a student must pay for one academic year at the school selected. This includes: tuition and fees, room and board, books, supplies, transportation and personal expenses, but may not include all your education expenses. The school assigns you your COA

because there are federally-set limits on the amount you can borrow annually, as well as cumulative lifetime limits.

Private loans

Private Loans

These loans cover the costs of education beyond the free money you receive and the federal loan amounts you are eligible for. MyRichUncle offers private loans for undergraduate, graduate and professional students, as well as internship and study abroad programs.

generally cost more, and are often used to cover the gap between what you owe the school and what you have received in free aid as well as what you’re allowed to borrow through the federal loan programs. Borrowers use private loans to pay expenses that federal loans can’t (because of borrowing limits) such as application and testing fees, room and board, and the cost of transportation and books.

When it comes to rates on student loans, private loan interest rates are set individually by the companies that offer them. Federal Stafford

Federal Stafford Loan

The most common federal loan for undergraduate and graduate students. It has two variations: the Subsidized Stafford Loan, whereby the government pays for interest accumulated until graduation, and the Unsubsidized Stafford Loan, where interest begins accumulating immediately. In order to qualify for the Subsidized Stafford Loan, financial need is established by filing the FAFSA. All students are eligible to receive the Unsubsidized Stafford Loan.

and PLUS loans

Plus Loans

There are two types of PLUS loans: The PLUS Loan for Parents helps parents pay for the education expenses of their child, and the Grad PLUS Loan is for graduate and professional students. Both kinds of PLUS loans can cover any costs not already met by the student's financial aid package, up to the full Cost Of Attendance.

have maximum rates set by the federal government. Most lenders set their rates at this maximum, but MyRichUncle discounts Stafford loan interest rates by .50%. This discount begins immediately at the start of your repayment period.

NOTE: It is crucial to understand that for either type of loan, families may choose whichever company offers them the best rates, and we encourage all families to shop for and secure the lowest rate possible. Students are not limited to the selection provided by their financial aid office, for either federal (provided the school participates in the FFEL Program

FFEL Program

The Federal Family Education Loan (FFEL) Program is what allows private companies to offer federal loans. Approximately 80% of schools are FFEL affiliated.

) or private loans.

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Components of a Student Loan

Like all loans, student loans consist of two components: principal is the amount borrowed, and interest is the amount charged for lending the money. Often, a student loan also has an origination fee,

Origination Fee

A processing fee that lenders charge to cover the cost of originating a loan. When it comes to private loans, your repayment plan, credit history, and the size of the loan are all factors that influence the size of the origination fee and whether or not one is charged. For federal loans, the Department of Education charges a mandatory origination fee, which some lenders may discount.

 which is a charge for processing and disbursing the loan.

Different loans have different interest rates. As of July 1, 2006, all new federal loans disbursed have fixed interest rates and origination fees. For private loans, the interest rate will depend on a variety of criteria including your credit history,

Credit History

Your credit history is a record of your personal debt and repayment history, including other loans, credit cards, mortgages, bankruptcies, and defaults. It plays an extremely significant role in the approval process and in determining the interest rates for private loans. If you don’t yet have a credit history, you should sign with a co-borrower, or you may qualify for our PrePrime™ funding. Credit history plays no role in Stafford loans.

 your credit score, and, with a MyRichUncle loan, your student characteristics.

Student Characteristics

MyRichUncle believes that success in school is indicative of your willingness and ability to repay your loans. Our PrePrime approval system gives you the best possible rate by taking into account your GPA, school, and course of study.

 Of course, different companies may also offer different rates for their federal and private student loans. In determining your rate (and in some cases the approval decision itself), MyRichUncle is the first student loan company to view students holistically, taking into account GPA, test scores, and program of study.

As mentioned earlier, federal loan rates are capped by the government and set by individual lenders. For MyRichUncle private student loans, the interest rate is controlled by two factors: LIBOR and the margin. LIBOR stands for London Inter-Bank Offered Rate, a reference index used by banks to set their interest rates. It is updated on the first business day of each month in the “Money Rates” section of The Wall Street Journal. The interest rate determined by LIBOR can roughly be considered the “wholesale” price of the loan. When a student loan company processes your loan, this is the amount they will need to pay to the bank to obtain your funds. At MyRichUncle we use the 3-Month LIBOR. The loan provider will then add additional interest, called margin, in order to generate a profit. LIBOR plus margin is what the student pays, and this can roughly be considered the “retail” price of the loan.

Student loan companies cannot change the LIBOR, but they can lower their margins to offer more competitive rates, and MyRichUncle does exactly that.

Margin can also be affected by the applicant’s credit history. In general, the more risky a lender believes it is to make a loan, the higher the margin will be in order to make up for that amount of risk.

The APR, or Annual Percentage Rate, is the total measure of what a loan will cost, taking into account the principal, interest rate, origination fee if any, and the timing of all payments. The APR is often used as a way of comparing the cost of borrowing money from one lender to another. By law, a creditor must disclose the APR before issuing a loan to a borrower. As a rule of thumb, borrowers should compare the APR of lenders they apply with and take the lowest rate.

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Student Loan Repayment

Student loan repayment plans vary, but there are usually three options: traditional repayment, interest-only repayment, and deferred repayment. In a traditional repayment plan, the borrower begins making payments on the principal and the interest one month after receiving the loan. This option generally has the lowest interest rate. In an interest-only repayment plan, the borrower makes payments only on the interest accruing on the loan while s/he is in school. In a deferred repayment plan, the borrower defers all payments on the loan until after graduation. This option requires no payments while in school, but often has higher rates and/or fees. Also, with a deferred repayment plan, the unpaid interest is added to the principal, increasing monthly payments. This is called capitalization.

With Subsidized Stafford Loans, the federal government pays the interest on the loan while the student borrower is enrolled in school. These loans are therefore very desirable for students; however, the Subsidized Stafford Loan is only available to those who demonstrate need as determined by the government through the Free Application for Federal Student Aid (FAFSA). Also, the amounts that can be borrowed are capped at limits below the average tuition price of American colleges. PLUS Loans for Parents do not have deferred repayment options; the borrower must begin paying back the loan approximately sixty days after the funds are fully disbursed.

Most interest-only and deferred repayment options, as well as Stafford loans, include a grace period of six months after graduation before the interest and principal repayment begins.

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The Next Step

If you want to know more about the specific student loans offered by MyRichUncle, select an option from the menu. If you’re ready to apply, start your educational loan application here.