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Loan counseling is an important part of the loan process, as most students have little or no experience with repayment and managing debt. Schools must ensure that students receive entrance and exit loan counseling. In addition to the schools providing the counseling, it may also be done by a consultant, a servicer, a lender or a guarantor.
At a minimum, schools must provide entrance counseling to first-time Stafford borrowers before the first disbursement of a loan can be made, and exit counseling to students before they leave school.
Understanding Student Loans
There are numerous organizations in the student loan process. Knowing who they are and what their roles are will make the entire student loan process easier to understand.
Federal Government – The federal government created the Federal Family Education Loan Program (FFELP) and the Federal Direct Loan Program to make higher education more accessible for students by providing low-cost education loans. The federal government defines loan program regulations, eligibility criteria, interest rates, repayment provisions and other terms and conditions of the program. All organizations must follow the guidelines established by the federal government. Schools – The school determines the student’s eligibility for student loans and other forms of financial aid using information from the Free Application for Federal Student Aid (FAFSA). The school processes the student’s loan request.
Guaranty Agencies – State agencies, such as ISAC, or private companies provide insurance for federal education loans and reimburse lenders for a percentage of the principal amount of loan(s) in cases of loan default or loan forgiveness due to death or disability. The guarantee on a federal loan replaces the security, or collateral, that is normally required to secure a consumer loan. Lenders generally do not provide unsecured loans for educational purposes unless those loans are federally guaranteed loans.
Lenders – The lender is the organization that provides money for student loans. In exchange for the opportunity to use the money to pay education expenses, the borrower agrees to pay it back later with additional cost charged in the form of interest and fees. The fees are based on a percentage of the amount borrowed.
Most loan terms and conditions are similar from lender to lender, since the federal government establishes the regulations, terms, interest rates, etc. for Federal Stafford loans and Federal PLUS loans. The difference among lenders is in customer service, repayment options and benefits, and loan servicing. Lenders may sell their loans to secondary markets before the repayment period begins. Some lenders do not sell their loans which allows the borrower to have one contact throughout the life of the loan.
Secondary Markets – Secondary markets, such as IDAPP, buy student loans from lenders. This helps lenders free up money to make new loans to students. If the loan is sold to a secondary market, the borrower will be notified; however, the terms and conditions of the loan will not change.
Loan Servicers – Servicers are used by some lenders or secondary markets to handle day-to-day student loan management. This may include sending billing statements during repayment, processing deferment and forbearance requests, and updating borrower accounts.
An entrance counseling checklist and an exit counseling checklist are available to you as reminders of the things that should be covered during these sessions.
For more information on Loan Counseling, see FSA Handbook: Volume 2 - School Eligibility and Operation, Chapter 6 - Providing Consumer Information. And, for information concerning online completion of the entrance or exit loan counseling requirement, visit the Mapping Your Future Web site.
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