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Ask Kantro: Questions about Maintaining and Regaining Eligibility for Federal Education Loans

I have a sophomore in college right now and will have another child starting her freshman year in college next year. We were approved for a Stafford Loan and a Parent PLUS loan for our son this year. We will need to have student loans to finance the entire amount of both kids’ education. Will we be able to continue to be approved for enough loans to get them both through college? We make too much money to qualify for any free aid, but don’t have anything saved for their education and can’t pay much monthly until I am able to get a full time job. — M.S.

The unsubsidized Stafford loan and the Parent PLUS loan do not depend on financial need. The Stafford loan has annual loan limits that increase as the student progresses from one year in school to the next. The annual limit on the Parent PLUS loan is up to the full cost of attendance minus other aid received. The Stafford loan does not depend on the borrower’s credit history. The PLUS loan requires the borrower to not have an adverse credit history, which is defined as having had a foreclosure, repossession, tax lien, wage garnishment, default determination or bankruptcy discharge in the last five years or a current delinquency of 90 or more days. Assuming that you continue to maintain a good credit history, you should continue to be approved for enough loans to pay for your children’s college education.

You should also continue to submit the Free Application for Federal Student Aid (FAFSA). When the federal government calculates the expected family contribution (EFC), it divides the parent contribution by the number of children in college. So with two children in college next year, your EFC should decrease significantly. This might make you eligible for some need-based financial aid, such as the subsidized Stafford loan or the Perkins loan or maybe even some grants. (The FAFSA is a prerequisite for the Stafford loan, which has a lower interest rate than the PLUS loan. So it is worthwhile to submit the FAFSA even if you do not expect to qualify for need-based aid.)

Don’t overlook the Hope Scholarship tax credit. When you pay for college costs using education loans, it still qualifies for the tax credit. Congress increased the maximum credit per child to $2,500 and expanded eligibility from two years to four for 2009 and 2010. They also increased the income phaseouts to $160,000 (fully phased out at $180,000) for taxpayers who are married filing jointly, and half that for single filers.

I am current enrolled in college. I was told that I am not qualified for financial aid because I have an outstanding student loan that went into default. How do I go about getting some money to pay for school because the money I got from working isn’t enough to provide for school and my family. — Derrick C.

Borrowers who have defaulted on a federal student loan are ineligible for federal student aid. However, defaulted borrowers may regain eligibility by making arrangements with the lender to repay the debt and by making at least six consecutive monthly payments in compliance with this agreement. If the borrower is subject to a court judgment concerning the failure to repay the debt, the monthly payments must be voluntary. Payments obtained by an offset of income tax refunds or wage garnishment do not count as voluntary.

This is a one-time opportunity to regain opportunity for federal student aid. Borrowers who default a second time are not eligible for federal student aid unless they repay the debt in full.

In addition to regaining eligibility for federal student aid, a defaulted borrower can rehabilitate the loan by making at least 9 of 10 consecutive voluntary monthly payments within 20 days of the due date. Loan rehabilitation removes the default from the borrower’s credit record. It also ends wage garnishment and the offset of federal income tax refunds.

If I have a student loan from my previous college will that hinder me getting another loan for a new school? — Joey R.

Federal student loans are subject to annual and aggregate loan limits. If you transfer mid-year from one college to another, your borrowing will be limited to just the remaining eligibility.

Depending on the date of the transfer, a portion of your federal student loan disbursements at the previous college may be returned to the lender, in which case you’ll be able to borrow the money that was returned at your new college. If you transfer after completing less than 60% of the semester it is likely that some of your student loan funds will have been returned to the lender.

In general, financial aid does not transfer from one college to another. You must reapply for financial aid at the new college. Your expected family contribution might be the same, but the cost of attendance will differ and the amount of student aid awarded by the college from its own funds will differ. Many colleges have limited student aid budgets for transfer students.

Ask Kantro is written by Mark Kantrowitz, an expert on paying for college and publisher of FinAid.org and Fastweb.com, the leading free web sites for information about student financial aid, student loans and scholarships. Write to Ask Kantro at AskKantro@Fastweb.com.