How to Choose a Lender and Guarantor for your Stafford or PLUS Loan
The University of Virginia participates in the Federal Family Education Loan Program (FFELP). This program offers low-interest Stafford loans to students enrolled in school at least half-time (minimum of six credit hours per semester) and PLUS loans to graduate students. The Law School Financial Aid Office certifies the loans and funds that come from private lending institutions such as a bank or credit union. Borrowers are required to select a lender and a guarantor. We suggest that you look at all borrower benefits before selecting a lender. As you get started, here are some terms and organizations in which you should be aware.
Lender—The lender is the bank or credit union that participates in the FFELP program. The lender supplies the money for the loan.
Guarantor—The Guarantor is an organization that provides the insurance for the loan in the event of a default.
Servicer—The Servicer is the organization that services the loan. Servicing includes processing payments, calculating accrued interest, etc.
Guarantor Fee—Guarantors are required to charge a 1.0% guarantor fee to the Federal government. Some guarantors are paying the fee for the borrower, and some lenders are paying the fee for a borrower. In any event, the fee must be paid by either the borrower or someone else. Example—A student borrows $5,500. If the student is responsible for paying the guarantor fee, then the net amount of the loan will be $5,445. If a lender is paying the fee for a student, the net amount of the loan will be $5,500.
Origination Fees—Origination fees are charged by the lender to the borrower. Origination fees are slowly being eliminated, but the current fee schedule is:
- A Stafford loan first disbursed on or after July 1, 2008, will have a maximum fee of 1.0%.
- A Stafford loan first disbursed on or after July 1, 2009, will have a maximum fee of 0.5%.
- A Stafford loan first disbursed on or after July 1, 2010, will have no origination fee (the fee will be eliminated).
Some lenders will pay the origination fee for the borrower.
Subsidized Loan—This is a need-based loan in which the Federal government pays the interest on the loan while the student is in school.
Unsubsidized Loan—This is a non-need-based loan in which the student is responsible for the interest on the loan while the student is in school. Our recommendation is for the student to pay the interest if at all possible because deferred interest will become principal during repayment.
Master Promissory Note (MPN)—Students are required to complete a MPN with their lender. This is a promise to repay the loan.
Front-End Benefits—Some lenders are offering front-end benefits to a borrower. These are benefits that occur when the loan is disbursed. Some examples of front-end benefits include the payment of guarantor fees, payment of origination fees, or a rebate of a portion of the principal amount.
Back-End Benefits—Some lenders are offering back-end benefits to a borrower. These are benefits that occur when the borrower goes into repayment. Some examples of back-end benefits include an interest rate reduction with auto-debit payments or a number of on-time payments, a rebate of a portion of the principal amount or rebate of the origination fees.
Students receiving Stafford loans must select a lender in order to receive the loans.
On-Line Assistance—Some websites offer on-line assistance in selecting a lending institution. Keep in mind that most of these sites may have partner relationships with certain lending institutions featured on their website. If you use a website, you should compare data on other similar websites, and also to any information you receive from your lending institution and personal bank.
Lenders Recently Used by Law Students for Federal Loans
Private Loan Programs
Many private lending institutions offer credit-based loan programs to students. Students should carefully consider the interest rates, loan fees, and terms of the program before making a selection. Here is some information to consider before selecting a private loan.
Know Your Score—Most private loans are based on the creditworthiness of the borrower and/or co-signer. Students need to know their credit score. The higher the credit score, the better the interest rate. Students can get their credit score at http://www.annualcreditreport.com/. This site has been created by the three crediting bureaus and allows students to get a copy of their free credit report and to buy a copy of the credit score.
LIBOR—London Interbank Offered Rate. The interest rate on some private loans is based on the LIBOR 3 month rate. The interest rate for the loan is probably variable and will change quarterly.
Prepayment Fee—Make sure the private loan does not have a prepayment fee for early repayment.
Deferment—Most private loans offer a deferred payment option. If loan payments are deferred, interest will accrue. Our recommendation is to pay the interest if at all possible so that your principal will not increase. Some interest rates for deferment may be different than the repayment interest rate.
Repayment Fee—A few lenders actually charge a fee for going into repayment. Shop around to avoid this fee.
Late Payment—Find out from the lender at what point a payment will be considered late.
Credit Worthy Borrower—A borrower or co-signer who has sufficient credit to borrow or co-sign for a loan.
Credit Ready Borrower—A borrower who does not have any credit history but is ready to establish credit.
