An Outline of Personal and Business Loan Categories and Their Uses

The number of loan products have increased over the past 20 years as economic necessity and a demanding public in need of specialization to solve financial circumstances. From personal loans, educational loans, business loans and even municipal loans. The entities that took part in the creation of the various financial products are actuaries, risk management professionals, “information and informatic engineers” and Wall Street amongst others. It was necessary to create, enhance or break down for better or for worse loan services and products to keep money fluid in a diverse marketplace that required funds to address niche demographics.

Personal Loans

Signature Loans – A signature loan is just as it sounds. One applies for a loan and gives a signature on a promissory note to repay the loan in a certain amount of time. That amount of time is called a “loan term ” and may be from six months to five years. Signature loans usually require good credit and the criteria for loan approval are mostly based on the borrower’s credit and and to a lesser degree on assets. Not all signature loans have the same parameters for qualifications. Some loans may require the borrower even with good credit to account for assets to show the lending institution for underwriting purposes. The institution may or may not place a lien on the assets but nevertheless wants to have documentation proving that there are indeed financial or physical assets owned by the borrower. Signature loans usually come with lower interest rates than other types of consumer loans like payday loans, credit card advances, title loans and some car loans. More on these topics later. Who are the lenders in signature loans? They range from large subsidiaries of auto manufacturers to banks, savings and loan institutions, finance companies and payday loan companies.

Credit Card Loans – Credit Card loans or cash advances from credit cards are another form of personal loans. These quick loans are more readily available to the general public and does not require a credit check. To obtain the initial card more than likely required a credit check or at least the process of identification for secured credit cards. Credit card loans or advances usually come with higher interest rates and also other fees for having access to the cash. Various entities allow access to the credit card cash advances from bank tellers, check cashing facilities and automated teller machines (ATMs). The fees vary based on source used to access the funds. To lower the fees for cash advances some use check cashing facilities to have the card charged and receive cash back in turn for not having to incur the fees of ATM machines as cards are assessed a fee twice; first by the ATM company and also their bank. The interest rates on credit card loans or advances are usually higher than signature loans. There are some states that have usury laws that have lower interest rates on credit cards. The loan or advance on a credit card is not a “term loan” as with most signature loans. It is more or less a line of credit the borrower has access to when they need it as long as there are funds available on the credit card. Interest on consumer loans are no longer tax deductible as in previous years. They were designed for short term borrowing needs but many have come to use their credit cards as a regular source of funds in tight economic times or between paychecks.

Wedding Loans – A relatively new form of loan to carve out a niche for the lending industry and meet the needs of the increasing costs of weddings is the Wedding Loan. Because of the expense of weddings which can range into six figures, it sometimes requires a personal loan or even a business loan of the families involved to provide a proper wedding. Wedding loans can be secured (using assets for collateral) or unsecured (signature loans) to obtain funds for the ever growing need to pay for the escalating wedding costs and all the various services and products that a successful matrimonial ceremony would need. The credit criteria and the term may vary based on the amount needed and financial status of the people involved.

Payday or Cash Advance Loans is a fast growing market because it usually requires the least of credit criteria used for loan approvals. One can have bad credit for a quick and instant loan. Just having proof of income, proof of identity and a checking account is all that is necessary to secure funds. Even today many have checking accounts without checks one can still obtain a cash advance by asking their bank to produce a one time check to give to the payday loan agency. Many payday loan companies and stores can get approval with no faxing of documents as they utilize other means for proof of income. Although payday loans come with very high annualized interest rates they sometimes are the only source of emergency cash loans for those in need.

Automotive, Motorcycle, RV (recreational vehicle) and Boat Loans – These personal consumer loans are usually not signature only loans but asset based loans. In other words a financial lien is placed against the asset to secure a loan to purchase or refinance the car, boat et al. These consumer loans may sometimes require a down payment of five to twenty-five percent to secure enjoyment and use of ownership. Because these are not funds that are already available as with credit cards they come with a “loan term” from one to six years depending on the choices of the consumer, the marketplace and the credit status. The interest rates can range from very low usually offered by manufacturers of cars, motorcycles, RV’s (recreational vehicles) and boats to very high if the borrower uses a credit card, a finance company or a “buy here – pay here” lender – or the car dealer who finances the purchase of the car by giving the borrower a term of months and years to pay the balance of the loan off.

Business Loans

SBA (Small Business Administration) Loans are loans that are given to small businesses which are not able to qualify for a loan from a financial institution for various reasons from lack of business history, lack of collateral to “secure” the loan or not having an adequate credit history. The SBA is not a direct lender but acts as an underwriter on behalf of the bank that funds the loan for the business entity. If the borrower defaults on the loan the SBA will pay the bank a percentage of the balance for taking the financial risk to loan the funds to the business. There are various types of SBA loans which will not be covered in this article but a future article will explain in more detail.

Conventional Business Loans are loans that are either unsecured meaning no asset is used to approve the loan or secured and called “asset based loans” where assets from inventory, equipment, accounts receivable or real estate are used for underwriting for loan approval. Conventional business loans are given to business entities that have great banking relationships, established business credit history with trade lines with other businesses they do business with and good standing with various credit reporting entities like Dun & Bradstreet. There are short term loans with interest only payments with the balance due at the end of the loan usually referred to as a “Balloon Loan”. There are also longer term loans that are fully amortized (principal and interest in each payment) paid over one to five years or more.

Equipment Leasing is a financial instrument which technically is not a loan. Meaning based on tax ramifications and who owns the equipment – leasing is just that – leasing an asset owned by another entity. Leases are usually from large corporations or a bank. The lease term can vary from one to five years or more and there usually are tax benefits to the business entity in leasing new or used equipment.

Equipment Sale Leaseback is a transaction to use equipment that is already owned by the business or municipal entity to secure funds for the present need for operations. The term can vary from one to five years and the amount of funds can vary based on credit history and a percentage of the fair market value of the equipment. The company then in turn leases the equipment back in usually a monthly payment. The company or the lessee normally has different choices on what they want to do with the equipment at the end of the term. They can roll the lease transaction into newer more updated equipment or software. They can buy the equipment for one dollar or ten percent of the fair market value of the equipment.More and more companies are leasing today as opposed to paying cash or using bank lines or loans.

Merchant Cash Advance is used by businesses that need fast cash and can’t qualify or don’t want to go through the process of getting bank approval for needed funds. A Merchant Cash Advance is also not a loan product but it is the selling of assets or credit card receipts at a discount. In other words the Merchant Cash Advance company buys the credit card receipts and then attaches a fee usually every time the business “batches”, settles or closes the day’s or week’s sales until the funds advanced are paid off. There is no term with merchant cash advances as it is not a loan so there is no set payment amount or period. The paying off of the advanced funds vary based on a the credit and debit card transactions of the day or week.

Factoring Accounts Receivable Invoices enables a business entity that normally has to wait 30 days or longer to be paid by other businesses or governmental entities. Again factoring is not technically a loan but a selling of invoices at a discount for cash now. In a typical transaction the company applies with a Factoring Company and the company looks primarily at the credit of the other business or governmental entity that the company is doing business with. Based on that as long as the client of the company is a solvent business or government agency the invoices are bought and funds are dispensed to the business usually within three days of due diligence on the company they are transacting business with. In other words the funds are dispensed after there is a credit check and processing of the other company. The dollar amount that is advanced can vary from fifty percent of the invoice to eighty or ninety percent depending on various factors such as the size of the invoice to the credit criteria of the other company or governmental entity whether it is a city, county, state or federal agency.

Medical Factoring is a financial transaction that benefits medical entities like hospitals, clinics and various health care professionals that have to wait to receive funds for services performed on patients. Like Factoring and Merchant Cash Advances Medical Factoring is the selling of assets in this case invoices for cash now. In many instances the health care industry receives payment from third party entities like insurance companies, Medicaid and Medicare and state entities that provide funds for those in need of medical procedures. The medical facility or professional in turns sells the invoice(s) on a on going basis or one time for cash now. Once there is an interest is selling the receivables then a Factor steps into analyze the billing so that funds can be advanced. This process can vary in length but is usually shorter in length than the process of getting bank financing.

Contract and Purchase Order Funding allows companies to bid on large projects for governmental agencies, hospitals, universities, prison systems and municipalities or also to sell to larger corporations even if the business does not have the credit or bank approval or the wherewithal to service or fulfill a large contract order. Similar to Factoring which works hand in hand with Purchase Order Funding it is not a loan but a simultaneous transaction that involves advancing funds based on the credit of the governmental agency or larger company and the size of the contract. The funds that are advanced are for the cost in completing the order of products or performing services. So the profit that will be gained is not advanced but the costs as in raw and finished material, transportation, production, labor, expertise and any other costs involved in completing the contract. Once the contract is completed or once an invoice is ready to be sent to the client a factoring company which is sometimes owned by the same company buys the invoice at a discount and the funds that would normally be advanced to the company are usually used to settle the amount advanced for the material and other services that were needed to complete the order. Contract and Purchase Order Funding usually requires large transaction amounts as opposed to factoring that can be utilized for invoices as small as one hundred dollars. With the use of Contract and Purchase Order Funding companies that were locked out of the process of bidding on large contract s may become players in multi-million dollar deals.

Commercial Real Estate Sale Leasebacks are similar to Equipment Sale Leasebacks featured in this article. Instead of utilizing owned equipment to secure cash when bank borrowing is not wanted or not available the commercial real estate is used to access funds now. This can vary from office buildings, medical buildings, retail franchises, industrial buildings and manufacturing to large utility plants. This frees up cash “locked” away in real estate. Many entities find that at the present time the business they are in whether it is retail, manufacturing or another field that the holding of commercial real estate is not in their best financial interest for now. They prefer to put to use funds for their industry. So a retailer selling retails goods decides to focus on the retail operations and to lease the space because that real estate when factored into a myriad of calculations does not fit their financial goals during the present time. Yes the ownership of commercial real estate is an asset and can be used as a security for a loan but may also be viewed as a fixed non-performing entity that does not meet the needs of the business, organization, group or individual that owns the building. Commercial Real Estate Sale Leasebacks are another form of getting access to funds and has increased over the years.

SBA Loans and the New Small Business Bill

Near the end of September 2010, President Barack Obama signed a Small Business Bill into effect. The new bill set aside $30 billion for small business lending. The law also includes $12 billion in tax breaks for small companies. This bill was signed into effect as a response to the 9.6 unemployment dissent in America. President Obama and the administration signed the bill to demonstrate an effort to decrease the unemployment levels in the United States. President Obama hopes that the loan will create as many as 500,000 new jobs within the next couple of years.

Small Business Jobs Act 2010 Changes

The Small Business Jobs Act includes the Recovery Act Loans Extension that provides $14 billion in lending support. Small Business Administration (SBA) Recovery loans will be extended under the law with a 90% guarantee and reduced fees. At the time that the bill was signed, 1,400 small businesses were waiting for funding. Since the signing of the Recovery Act, 70,000 Recovery loans have been supported. Over $680 million dollars have created $30 billion in lending support.

The bill supports higher loan limits, and the maximum loan sizes increased in the pre-established loan programs. The new bill also increases the 7(a) and 504 loan limits from $2 million to $5 million. Manufacturers may receive up to $5.5 million. The 7(a) loan program is one of the most flexible loan programs offered for start ups and existing small businesses. Most of these loans are gained through commercial lending institutions. The 7(a) loan program includes an Export Loan program and a Rural Lender Advantage program. Some businesses will be able to refinance and incorporate their commercial real estate mortgages into the 504 loan program. However, this only applies to owner occupied units.

Microloan limits increased from $35,000 to $50,000. These loans are designed to help entrepreneurs with large start-up companies and small businesses owners in underserved communities. The new bill also increases small business eligibility for SBA loans. They make this possible by increasing the “alternate size standard” to small businesses with less than $15 million in net worth. This also applies to those businesses with less than $5 million in average net income. The law also increases the amount of Small Business Administration (SBA) Express loans from $350,000 to $1 million. Working Capital and Commercial Real Estate Refinancing received temporary enhancements to assist small business owners.

Tax Cuts

The tax cuts include the following:

– More Deductions for Start Ups
– Deductions for Cell Phones provided by the Employer
– Self Employed Health Insurance Deductions
– Penalty limitations for small business tax reporting errors
– Accelerated or Bonus Depreciation
– Provisions for up to Five Years of Net Operating Losses
– Up to $500,000 for Small Business Expenses: The Highest Expense Ever

Fees Associated with the SBA Loans

Fees are assessed to offset the costs of the SBA loan to the taxpayer. Lenders are charged a guaranty fee and servicing fee for each approved loan loan. The fees are a percentage of the amount loaned to the borrower. The lender may charge the guaranty fee upfront. However, the borrower is not responsible for the lender’s annual fee.

ARC Loans

ARC Loans are small business loans that do not carry any associated fees. In the past, the fees for loans were between 1% and 3.5% of the total cost of the loan. ARC loans offer 100% guaranty from the SBA to the lender. No fees are required to be paid to SBA. Many of these loans are provided over a six month period. The repayment of the principal of the loan may be deferred for 12 months after the final disbursement of the loan. Repayment may last as long as five years. The best candidates for this type of loan are companies that have been profitable in the past, but are currently struggling. These companies may have begun to miss payments recently because of financial hardship. These funds may be used to make payroll, buy inventory or improve core operations.

7(a) Loans

Lenders will be charged an annual fee of 0.55 percent of the guaranteed portion of 7(a) loan. The fee will only be assessed to the balance of the loan and not the entire loan amount.

504 Loans

Borrowers will pay an annual fee of 0.749 percent on the outstanding balance of the 504 loan. This amount increased from 0.389 percent. Loan interest rates may not exceed 4.75% and may be as little as 2.25% when negotiated through a bank.

How Long is the SBA Loan Process?

Since the Small Business Administration is a guarantor and not a lender, the amount of time required to approve the loan will vary. The Small Business Administration attempts to reach its decision within seven to 21 business days from the receipt of the application. To accelerate the process, applicants should have several components of their application in place.

The length of time it takes for the SBA to respond to the application depends on the loan program your business elects to apply to. A business plan with financial statements is required for all loan programs. Earnings projections and collateral offerings must be established. In general, the SBA microloan is the least time consuming application and will be approved the fastest. The maximum loan amount was increased to $50,000. The funds cannot be used to buy property or pay debt.

Top Five SBA Loan Lenders

The banks have sorted SBA lending by region. Some of the most prominent banks involved in lending are the following:

Wells Fargo Bank

Wells Fargo managed a No. 1 ranking between October 1, 2009 and September 30, 2010 for the Small Business Administration 7(a) loan. The bank issued 91 SBA loans with a total value of $31.9 million. The bank was the second leader in terms of ARC loans. The bank issued 23 loans for a combined value $710,100.

JPMorgan Chase Bank

Chase Bank issued 33 ARC loans with a total value of $935,100. They ranked No. 1 in this category of loans issued.

Mortgage Capital Development Corporation

This particular bank issued the most 504 SBA loans. Businesses may use these loans for real estate purchases, property constructions and upgrades.

TMC Development

This bank issued 71 SBA loans for a combined value of $54.1 million. Nearly, 56 of these loans were 504 loans. The loans had a total combined value of $48.9 million.

Capital Access Group

Capital Access Group issued 51, 504 loans for combined value of $37 million.

Rates of Top Five SBA Loan Lenders

Wells Fargo

Typically, 3.5% of the SBA amount is due at the time of the loan. However, the fee may be financed. An origination fee may include bank fees. A fixed or variable interest rate will be negotiated by the bank for the Wells Fargo portion of the loan.

Chase Bank

A guaranty fee of 1% to 3.5% of the guaranteed amount must be paid by the lenders. The lender must also pay the annual fees of 0.25%. The lender may pass the guaranty fees onto the lender, but not the annual fees.

Mortgage Capital Development Corporation

This bank charges 0.389% of the balance of the loan for fees.

TMC Development

Most 504 loan programs will pay up to 90%. Therefore, most borrowers only have to make a 10% down payment. This bank offers a 4.39% interest rate to those seeking a loan. The fees are typically 1% or less.

Capital Access Group

Businesses may get up to 90% financing with a SBA loan. The interest rates are 4.40%. The fees are typically 1% or less.

Secured And Unsecured Loans In Bankruptcy

When it comes to taking out a loan, you should know they are not all the same. There are many types of loans and the terms and conditions of a loan can vary greatly. Different types of loans each have their own benefits and risks. The terms of a secured loan can be stricter than an unsecured loan. One of the main differences between these two types of loans is how debt collection efforts are handled in the event you default on your loan payments. Your debt repayment options may be managed differently in a secured loan than an unsecured loan. In the event of an extended financial hardship, you may not be eligible to have certain types of loans eliminated through bankruptcy.

Secured Loans

Most major loan purchases, such as your home or car, are called secured loans. They are called secured loans because the debts acquired under this type of loan are secured against collateral. A mortgage loan is considered a secured loan. In a mortgage loan, the lender has the right to repossess the home if you default on your payments. Defaulting on a mortgage loan can lead to foreclosure, whereby the lender takes over the rights to the home and may sell the home in order to satisfy the debts owed. Loans for car purchases are also secured loans. The lender can repossess your car and sell it to recover the loan amount. If the sale of the asset does not satisfy the full amount of the debt that is owed, you may still be held liable for repaying the remaining amount owed on the debt.

A personal secured loan is one in which you are using your home or car as collateral, but the money received in the loan is used to purchase other items. An example of a personal secured loan is a payday loan, in which you put the title to your car as collateral against the loan. Even though the loan is not used for the purchase of the car, the lender has the right to repossess the car if you default on repaying the loan. If your car is repossessed during a payday loan, you are still liable for any debts still owed on your car loan through the originating lender. This can lead to further financial trouble and more debt.

Secured Loans And Bankruptcy

Secured loans can be more difficult to manage when if you find yourself in financial trouble. A secured loan may not be eligible for elimination if you file for bankruptcy. In some cases, a Chapter 7 bankruptcy can eliminate the debt owed on a secured loan, but you may risk losing the property to the lender. Legally, lenders are allowed to seize and liquidate some of your assets in order to fulfill the debt payments of a secured loan. However, there are many states whose bankruptcy laws may offer exemptions for some of your assets. Bankruptcy exemptions may allow for your home and car can be protected from liquidation during bankruptcy. A Chapter 13 bankruptcy can protect your assets from liquidation through a Chapter 13 repayment plan. The repayment plan allows for you to keep your assets while you make payments towards the loan over the course of 3 to 5 years. Once you complete the repayment plan, you will be relieved of your loan debt and own the rights to the property.

The most important thing to remember about defaulting on a secured loan, is that time is crucial for protecting your assets. Once you realize you may not be able to make your payment, contact your lender and discuss negotiating a modified repayment plan. Many lenders prefer to modify a repayment plan that better suits your budget, than risk losing money through selling the property through foreclosure or repossession. If your lender is not willing to negotiate, seek counsel from a qualified bankruptcy attorney.

Unsecured Loans

Unsecured loans are loans that do not have any collateral used against the loan. The loan is unsecured because it is based on your promise to repay the debt. In an unsecured loan, the lender is not given any rights to seize or liquidate a specific asset. If you default on the loan, the lender may make debt collection efforts but are not afforded the right to reclaim any of your property.

The most common type of unsecured loan is a credit card. Defaulting on a credit card may lead to collection efforts, but creditors cannot take your assets to pay for the debt. Some personal loans are considered unsecured loans if you did not put up any of your property as collateral for the loan. Defaulting on unsecured loan payments can lead to negative consequences such as damage to your credit, harsh collection attempts and legal action. Another example of an unsecured loan is a student loan. Generally, student loans are treated seriously by the lending institution and defaulting on such loans can lead to significant consequences. Federal bankruptcy laws do not protect borrowers that default on a student loan payment and you risk having your wages garnished for purposes of paying the debt owed.

Unsecured Loans And Bankruptcy

Unsecured loans are much easier to have discharged through bankruptcy than a secured loan. A Chapter 7 bankruptcy can eliminate most of your unsecured debt. In some cases, the bankruptcy court may decide to allow for some of your assets to be liquidated to fulfill debt payments. However, bankruptcy laws offer exemptions to protect most of your assets in bankruptcy. As in a secured loan, a Chapter 13 bankruptcy will protect your assets as you make payments towards the debt.

Your debts are your responsibility, whether they are secured or unsecured loan debts. Although bankruptcy allows for debt relief when experiencing financial hardships, this assistance should not be abused. It is always best to repay your debts in full to prevent any further damage to your credit history and to maintain a good financial standing. However, good people may experience tough times. Bankruptcy can provide relief from your debts and protect your assets, but it is best to be properly advised about your financial situation before you decide to pursue bankruptcy. A qualified bankruptcy attorney can review your options and help you make the decision to put you on the path to financial stability.

The E-Z Guide To Student Loans (Stafford Loans)

Student Loans are a bit overwhelming at first. Especially when you’ve just graduated high school and you have so much other stuff on your plate.

I remember when I graduated high school, the only thing I wanted to know was “What will it take for me to get a college degree”. Whatever it was, I was prepared to do it. So I applied for financial assistance using FAFSA (the letters stand for Free Application for Federal Assistance in case you were wondering). Then once I actually got to college, I was ushered into a room and made to sign all this paperwork with the underlining idea being: Unless you’re going to pay your tuition cash or through some scholarship fund, you need to sign these student loan documents. I ended up signing and practically forgot about my student loans until I graduated. Then I got the bill…. OH BOY!

I believe everyone should know something about student loans before signing your life away… I mean the loan documents. Not to say that student loans are BAD per say, just that an informed person is more prepared to deal with something than someone who doesn’t know their hands from their feet.

So let’s get into it!

What kind of Student Loans are there?

The first one we’ll discuss is: The Direct Stafford Loan

The money being borrowed from this loan comes directly from your good ol’ Uncle Sam. Yes, Uncle Sam cares about you too! Direct Stafford Loans are “low-interest loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school.” I’m sure you’re asking what the requirement is to receive the Direct Stafford Loan and as with all complicated questions, the answer is, IT DEPENDS.

There’s two types of Stafford Student Loans

There’s the Subsidized Stafford Loan and then there’s the Unsubsidized Stafford Loan.

With the Subsidized Stafford Loan, you are not charged interest as long as you’re enrolled into school at least half-time and during grace periods and deferment periods. The Federal Government actually pays the interest for you while you’re still in school. So the loan value is actually the same amount you really borrowed. Sounds great right? Well there’s a catch. The catch is that this loan is dependent on the financial needs of the student. This loan isn’t available to everyone, its availability actually dependent on what tax bracket you and your parents fall into. Another catch is that your school actually determines how much you can barrow.

The second type of Stafford Loan is Unsubsidized Stafford Loan. This type of loan is geared toward those who are qualified for Subsidized Stafford Loans, but need a little more money to pay their tuition as well as those that aren’t qualified for Subsidized Stafford Loans but still need money to pay their tuition. Just about every household is eligible for Unsubsidized Stafford Loans.

How is that possible? Well for Unsubsidized Stafford Loans interest begins accumulating from the first time money is paid out. So the very first semester that your Unsubsidized Stafford Loan is applied to is also the beginning of interest accumulation on your loan. What that also means is the longer you decide to stay in college, the more interest will accumulate on your loan.

What a great way to motivate you to complete your degree in 4 years right? Well, not really, but it’s definitely worth keeping in mind. However, as a word of advice, you should try paying at least your accumulated interest while your still in school to avoid blowing up your loan even further. By doing so, you could get the same benefit that Subsidized Stafford Loans give by only being responsible for the amount of your loan by the time you graduate. If you decide not to pay anything towards your loan while still in school, you’ll end up with a hefty bill by the time you graduate since your accumulated interest ends up accumulating its own interest as well.

Another important point about Unsubsidized Stafford Loans is that, like Subsidized Stafford Loans, your school decides on the amount you receive. The Unsubsidized Stafford Loan isn’t quite the blank check you wished for, but it does help take care of those semesters at more expensive schools.

How much money can you barrow with the Stafford Student Loan?

Well as I mentioned above, ultimately your school decides that, but they also have to work within the limits set by the loan. The maximum amounts your school could allow you to barrow are listed below:

Dependent Undergraduate Student (except students whose parents are unable to obtain PLUS Loans)

First Year: $5,500- No more than $3,500 of this amount may be in subsidized loans.

Second Year: $6,500- No more than $4,500 of this amount may be in subsidized loans.

Third Year: $7,500- No more than $5,500 of this amount may be in subsidized loans.

Maximum Total Debt from Stafford Loans When You Graduate* (aggregate loan limits): $31,000-No more than $23,000 of this amount may be in subsidized loans.

Independent Undergraduate Student (and dependent students whose parents are unable to obtain PLUS Loans)

First Year: $9,500-No more than $3,500 of this amount may be in subsidized loans.

Second Year: $10,500-No more than $4,500 of this amount may be in subsidized loans.

Third Year: $12,500-No more than $5,500 of this amount may be in subsidized loans.

Maximum Total Debt from Stafford Loans When You Graduate* (aggregate loan limits): $57,500-No more than $23,000 of this amount may be in subsidized loans.

Graduate and Professional Degree Student

First, Second, and Third Years: $20,500-No more than $8,500 of this amount may be in subsidized loans.

Maximum Total Debt from Stafford Loans When You Graduate* (aggregate loan limits): $138,500-No more than $65,500 of this amount may be in subsidized loans. The graduate debt limit includes Stafford Loans received for undergraduate study.

* You can spend more than 4 years in college but the maximum total amount you barrow from the Stafford Loan cannot exceed the limit above.

Here’s an interesting fact:

Outstanding Student Loan Debt in the USA is about $850 Billion and growing while consumers owe about $828 billion in revolving credit, including credit card debt.

Should You Co-Sign on Someone’s Student Loans?

Unlike other forms of consumer debt, student loans receive special protections under current laws ranging from collection to bankruptcy. This special status applies not only to the primary borrower (the student) but also to any co-signer on the loan.

Student loans are one of the hardest types of debt to shake. Current U.S. bankruptcy law allows a court to discharge these loans in bankruptcy only in the narrowest circumstances. In fact, the legal requirements for discharging education loans are so formidable to meet that most bankruptcy attorneys avoid student loan cases altogether.

Since so few loan borrowers qualify for bankruptcy discharge under the law, the vast majority of loan debt is carried until the borrower repays the loan or dies — although some non-federal student loans even survive death, passing the debt on to the borrower’s co-signer.

Co-Signer Requirements of Student Loans

Most government-issued student loans don’t require a co-signer. Federal Stafford student loans and Perkins student loans are awarded to students without a credit check or co-signer. The one exception would be federal Grad PLUS loans, which are credit-based graduate loans.

Federal PLUS loans for parents are also credit-based and may, in certain cases, require a co-signer for the parents to be able to take out the loan. However, the credit requirements for federal PLUS parent loans and for federal Grad PLUS student loans are much less stringent than the credit requirements for non-federal private student loans.

Private student loans are credit-based loans issued by private lenders or banks. Under current credit criteria, most students, who typically have little or no established credit history, will require a co-signer in order to qualify for a private student loan.

Typically, a co-signer is a relative who agrees to pay the balance of any co-signed loans if the student fails to repay the loan, although a family relationship is not a requirement. A student may have an unrelated co-signer.

Federal Student Loans vs. Private Student Loans

Government-backed federal student loans come with certain payment-deferment and loan-forgiveness benefits. Borrowers who are having difficulty making their monthly loan payments may be eligible for up to three years of payment deferment due to economic hardship, along with an additional three years of forbearance, during which interest continues to accrue, but no payments would be due.

For borrowers who are on the government’s income-based repayment plan, any outstanding federal college loans can be discharged prior to full repayment if the borrower has made her or his monthly loan payments for 25 years. Borrowers who go to work for the government or the public sector can have their federal college loans forgiven after 10 years.

Federal college loans can also be forgiven in the event the borrower dies or becomes permanently disabled.

Non-federal private student loans, on the other hand, aren’t required to offer any of these payment-deferment or discharge provisions. It is at the lender’s discretion whether to offer a struggling borrower deferred or lower monthly loan payments and even whether to discharge the private student loan upon the borrower’s death or permanent disability.

Without any special dispensations from the lender, private student loans will generally remain in repayment until the note is satisfied or charged off as a default, no matter how long the repayment process takes.

The Legal Implications of Co-Signing on Student Loans

A loan co-signer has all the same legal responsibilities as the primary loan borrower and has a legal obligation to repay the loan debt under the same terms as the primary borrower. The co-signer is really a co-borrower and is equally responsible for repaying the co-signed loans.

Unfortunately, too many co-borrowers realize this truth very late in the game.

If you’ve co-signed on someone’s loans and your primary borrower makes all of her or his payments on the loan on time and as planned, you may never hear from the lender. If your primary borrower starts missing payments or payment due dates, however, the lender will contact you.

Normally, by the time the lender is contacting you, the loan you’ve co-signed is already past due, and your credit rating may have already taken a hit.

Keep in mind, too, that any legal remedies a lender has at its disposal for pursuing a loan debt can also be applied to the co-signer. These legal remedies include assignment of the delinquent loan account to a debt collection service and a possible court action. For delinquent federal education loans, the government may seek to garnish your wages or seize any income tax refunds you have coming your way.

In addition, delinquencies or a default on any loans on which you’ve co-signed will appear on your own credit report with all the same adverse effects as on the primary borrower’s credit report. The debt from any co-signed loans will also remain on your credit report as an open obligation until the debt is repaid (or written off in the event of a default).

4 Tips for Protecting Yourself as a Co-Signer on a Student Loan

So should you co-sign on a student loan? You can never predict the future, and unfortunate circumstances can derail even the best-intentioned and responsible student borrower.

If you do decide to co-sign on a loan (or any other loan, for that matter), make sure you clearly understand what your responsibilities are and under what circumstances you would be expected to take over the note:

1) Have a firm understanding with your primary borrower about the repayment plan — you may even want to consider putting a signed, written agreement in place between the two of you — and stay in contact with the lender to make sure that the monthly loan payments are being received on time and as agreed. If your primary borrower misses a payment date, contact her or him immediately to discuss the problem.

2) Work with the lender to ensure that you receive duplicate copies of monthly statements, and periodically check your credit report to make sure your credit is still in good standing. Also, bear in mind that being a co-signer on an outstanding loan may reduce your overall creditworthiness since the loan debt will be viewed as a liability.

3) If your primary borrower communicates to you that s/he is having difficulty making the monthly loan payments, contact the lender immediately. For federal college loans, ask about your loan deferment and forbearance options. Private student loans generally don’t offer the same deferment and forbearance benefits as federal student loans, but some private student loan lenders may be willing to discuss a deferred payment arrangement or alternative payment plan.

4) If your primary borrower misses a payment or stops making payments altogether, you’ll be expected to take over the loan payments. You may have legal recourses with regard to the borrower, but those are separate from the legal obligations of the loan itself. The lender will be looking to you, as a co-signer, to make the monthly loan payments until the primary borrower can resume responsibility for making the payments her or himself.