Federal student loans have lower interest rates, more favorable terms (such as income-based loan repayment), don’t require a co-signer, and freeze your repayments and interest while you’re in school. All these factors, coupled with the instability of the private loan market starting last fall, make federal student loans a much better option than private student loans for students.

Congress concurs, which is why a House committee recently took up a bill to more closely regulate private student loans within its overhaul of banking regulations. If approved, the Consumer Financial Protection Agency Act of 2009 would create a new centralized federal agency to oversee various forms of consumer credit, including private student loans, credit cards and mortgages.

Meanwhile, the College Board issued its Trends in Student Aid Report last week, which shows that the amount of private student loans taken out in 2007-2008 dropped by more than 50 percent from the previous year. Last year, students privately borrowed $11 billion — representing just 13% of the total student loan market for that year. In 2006-2007, $22.8 billion was borrowed, or 25% of the total market.

Did everyone suddenly realize that federal loans were a better deal? Maybe, but there not necessarily, say the experts. There were a variety of factors that led to the scale-back, including:

• Tightening up of the financial markets — there are now fewer private lenders, with tighter restrictions on eligible borrowers

• More families are qualifying for federal student loans now, with so many out-of-work parents

• Congress increased the federal limits on federal student loans from $23K to $31K for ‘dependent’ undergrads last year — more money to borrow federally, making private loans less necessary

Are you seeing this trend in your family? Do you prefer federal student loans to private student loans?

A group of 15 senators is introducing a new bill to change this, providing immediate student loan debt relief to active-duty soldiers and members of the National Guard. According to a blog post from Senator Arlen Specter (R-PA), the bill

would prohibit interest from accruing on direct student loans, regardless of the date of origination, for all service members on active duty for up to 60 months. This would save the average service member between $1,183 and $1,479 over the course of a 12- to 15-month activation period.

Between this and the delays with tuition benefits from the new GI Bill, I am feeling rather frustrated for our nation’s soldiers and veterans. Are you a member of the military struggling with paying for your college tuition or your student loan payments? What do you think of the new Spector-sponsored bill?

The Student Aid and Fiscal Responsibility Act of 2009, now being debated by the Senate, will cease subsidies to private banks providing federal student loans.

Instead, the federal government will directly make loans to student, saving some $40 billion over 10 years. The Act will then redirect those savings to increase funding for the Pell Grant, expanding the number of eligible students and upping the maximum award to $5,550 per year.

Additional changes in the bill include:

• Expanding the Perkins Loan Program for low-income students
• Allocating $10 billion to Obama’s community college initiative, which aims to produce 5 million more 2-year college grads by 2020
• Give grants to states and institutions with innovative approaches to increase college retention and graduation rates
• Simplify the FAFSA form

The bill passed the House with overwhelming Democratic support, and just five Republican votes. Congressional leaders expect a similar partisan split in the Senate vote.

The number has been rising for many years, but this bump is the largest on record.

The deputy undersecretary of the Education Department, Robert Shireman, has said that this increase was “definitely above expectations” but was likely caused by the nation’s dire economic crisis.

According to the National Postsecondary Student Aid Study, two out of three college students borrow money to pay for college — and their debt load is growing significantly. In 2008-2009, the average debt load was $23,186; in 1997 the average amount was $13,172.

With a growing debt load and the highest unemployment rate since 1983, recent grads face a huge challenge: How to pay off mounting debt with the salary from a low-paying job… or no job at all. According to a number of research studies, this challenge has become so great, that many grads are postponing major life events — getting married, buying a home — indefinitely.

Read more in the Wall Street Journal about how college loan debt is impacting students once they graduate.

So what’s that we keep hearing about how all students are drowning in student loan debt? According to one of the College Board’s researchers, Sandy Baum:

People think students are drowning in debt, and there is a small proportion of students that borrow an exorbitant amount, but most students graduate with a manageable debt load.

Here are the stats:

• 34% of Bachelor’s degree graduates, and 41% of two-year degree holders had no debt upon graduation.

• The median student loan debt among those who did borrow was just under $20K, up 5% from the previous survey conducted five years ago.

• The total student debt for all non-graduate students (including those who had 0 debt) was $15,123, up 11% from 2003-2004.

• 10% of BA graduates (and 6% of those earning a two-year degree) had more than $40K in student loan debt upon graduation * Whether you borrow (and how much) seems to depend on the type of school you attend. 98% of student at a for-profit two-year college took out student loans, while only 38% of students at a public two-year college did.

• Borrowing also seems to be related to whether you go to school full-time or part-time (which makes sense, since most full-time students have less time to work). 50% of full-time students took out loans, including 19% who took out private student loans in addition to federal loans.

If you want to learn more about your options, be sure to check out the Financial Aid Finder’s articles on College Student Loans.

Known as the Student Aid and Fiscal Responsibility Act of 2009, the President’s plan would expand the number of students eligible for Pell Grants.

Currently 40 percent of American college students receive Pell Grant assistance. In addition, the bill would tie the dollar amount of the Pell Grant to the rate of inflation, allowing for a maximum increase from $5,550 next year to $6,900 by 2019.

In order to pay for the increase in Pell Grant funding, the bill would eliminate subsidies for federal student loans by private lenders such as Sallie Mae, replacing them with direct loans from the federal government. To learn more about the Student Aid and Fiscal Responsibility Act, check out this post from back in February when the President first announced his plan to overhaul student loans.

The average cost of text books is $1,000 per year, for example. And college fees aren’t cheap either.

One of the best ways to ensure that you graduate college without having to charge your way through is to apply for as many scholarships as possible. Whether you need an extra $2,000 or $20,000, the more scholarships you apply for, the better your chances of winning enough to cover your bills. Not sure where to find out about scholarships you might be qualified for? Here are five great ways to look:

1. Take advantage of free scholarship search engines.
Google scholarship search and you will end up with tens of thousands of links. How do you know which one to click on? The key is that these engines should be free. There is no such thing as a secret cache of scholarships, so don’t get sucked in by a website (or worse, a person cold calling you on the phone) promising access for a “low, low fee”. You should be able to search whenever you want, as often as you want, for free. For more on the most reputable search engines, check out our article on the top 5 Free Scholarship Search Engines.

2. Visit your college financial aid office.
Your college or university’s office of financial aid should have binders — or computer files — of scholarships, including private scholarships just for your school. Often endowed by alumni or university relations boards, these scholarships may target students from particular areas of the state or country, students majoring is specific subjects, or students of a certain ethnic, national or religious background. Set up an appointment early in the spring with a financial aid counselor and visit the office regularly for updated information.

3. Call you local community service organizations, religious groups, etc.
Open up the yellow pages and start making some phone calls to your local Kiwanis clubs, Chamber of Commerce, church, synagogue or mosque, and any other relevant community service group you can think of. These scholarships may not be big dollar, but your chances of winning them are much higher than with national scholarships. And five local scholarships worth $500 each still add up to $2,500 for school next year. Another tip: ask your boss or the company your parents work for if they sponsors any scholarships — and if they don’t, ask them if they would like to sponsor one now!

4. Meet with your academic advisor or department chair.
Just like your university may have special scholarships exclusively for enrolled students, your academic department may also have a limited number of opportunities for its students. While these gigs are fewer and farther between than the offerings on a free scholarship search engine, your odds of being ideally qualified for them are much better. You can learn more about student scholarships by college majors at the Financial Aid Finder’s newly expanded scholarship section. In the last week alone, we have added scholarships for biology majors, business major scholarships, scholarships for history majors, English major scholarships and more.

5. Read the Financial Aid Finder’s Friday Scholarship Announcement Post
If you are a regular reader of this blog, you probably already know about Scholarship Friday. That’s when I post about three scholarship opportunities with upcoming deadlines. I do my best to find national scholarships — so whether you are reading in Maine or California, you will still be eligible to apply. You should still be doing steps 1-4, but our Scholarship Friday is one very easy way to learn about great scholarship opportunities.

Have you found a great source for college scholarships? Tell us about it in the comments section!

• Interest rates on subsidized Stafford loans are dropping — This year, they will go from a 6% to 5.6% (fixed). Under the College Cost Reduction and Access Act of ‘07, the rate will continue to drop until 2011-2012, when it will reach an all-time low of 3.4%. Unfortunately, the lower rate only applies to loans taken out — or consolidated — in that academic year. Remember, with a subsidized loan, the federal government pays your interest while you are in school.

• Income-based loan repayment — I won’t bother rehashing the details, since I’ve covered them extensively in earlier posts. Bottom line is this: If you qualify, you will save a bundle every month.

• The Pell Grant is increasing — The maximum annual amount will increase next fall from $4,731 to $5,350. If your family earns less than $50,000 per year, you likely qualify for the Pell Grant, so be sure to complete your FAFSA (Free Application for Federal Student Aid).

What do you do if federal student aid is still not enough to help you cover your education costs? It’s time to expand your search for scholarships. Don’t forget to check out our weekly Scholarship Announcement post every Friday. And now you can get even more information on specialized scholarships through our brand new Student Scholarship Search page. Check it out today!

In fact, why not set a goal for yourself: 100 days of summer, 100 scholarship applications. You won’t get all of them. You won’t even get half of them. But even if you win jut 5 percent of the scholarships you apply for, that could translate into tens of thousands of dollars to apply toward your tuition bill next fall.

As you know, every week, I make it easier for you to apply for free money for college by posting about three scholarships with upcoming deadlines. I only search out those scholarships that have wide, national appeal, so hopefully as many of you as possible will be eligible to apply. This week, I have a $5,000 engineering scholarship, a variety of $500 scholarships for Star Trek fans, and a $500 scholarship for studying abroad.

If you want to find out about more scholarships, try using a free scholarship search engine. Just be sure to check out our article on scholarship searches first, so that you can be sure to avoid a scam! Our scholarship section is a great place to learn more about navigating the scholarship application process, writing scholarship essays, and avoiding unclaimed scholarship scams.

1. Golden Key International Education Programs (IEP) Scholarship: $500
If you would like to study or intern abroad, but are worried you can not afford it, here is a great opportunity for you: The Golden Key’s International Education Programs (IEP) aims to promote the cultural immersion of college students through study programs, internship placements and service opportunities in 16 different continents around the world. To support students in their international exploration, IEP offers ten $500 scholarships exclusively for Golden Key members. To be eligible, you must be a student member residing in Australia, Canada or the United States panning to attend an IEP semester abroad program. You must also be currently enrolled in a full-time or part-time undergraduate course of study at an accredited four-year college or university. Membership in Golden Key is required as of the date of your application. The application deadline is July 1, 2009.

2. Starfleet Academy Scholarship: $500

The International Star Trek Fan Association (yes, seriously!) annually sponsors more than one dozen $500 college scholarships. Awards are open to any active Starfleet member currently attending a community college, four-year college, or most technical, junior or graduate school. The scholarships include:

• DeForest Kelley/Dr. Leonard McCoy Medical Scholarship for a wide range of medical studies

• James Doohan/Montgomery Scott Engineering Scholarship for engineering

• Patrick Stewart Scholarship for the Performing Arts

• George Takei International Studies Scholarship for the study of foreign languages or studies abroad.

• Armin Shimmerman Scholarship for business and management studies.

• Marina Sirtis Veterinary Science Scholarship for veterinary medicine and related fields.

• LeVar Burton Educational Scholarship for teachers

• Gene Roddenberry Memorial Scholarship for aspiring writers

• Space Explorers’ Memorial Scholarship for all courses of study

• The Law & Order Scholarship for those studying law enforcement.

For more information, or to request a print application, contact the SFA Scholarship Director at scholarships@sfi.org. The application deadline for all the Starfleet scholarship is July 1, 2009.

3. ASCO Numatics Industrial Automation Engineering College Scholarship: $5,000
The ASCO Numatics scholarship is a merit-based scholarship for engineering students who demonstrate leadership potential in the fields of engineering, instrumentation, systems, and automation professions. The scholarship committee puts special emphasis on students with proficiencies in fluid control and fluid power technologies. Applicants must be legal U.S. residents or citizens who have completed their sophomore year in a Bachelor’s degree program or be enrolled in a graduate program, at the time of application.

Five experts sounded off on the question, “How much student loan debt is too much?” (Did you answer that question for our student debt poll on Tuesday? Please do that now if you haven’t already!)

You might also want to check out the Times’ follow-up to their student debt piece, appropriately titled Student Debt, Fool’s Gold? There are hundreds of reader comments that painfully, at times, illustrate the naivety with which so many students take out tens of thousands of dollars in student loans. If nothing else, it’s an eye opening read.

***

I have received a number of emails over the past week about a post from last Monday regarding the new income-based repayment option for federal loans, set to start on July 1st. Here is one of those emails from Richard in Richmond, Virginia.

I read with great interest your post about reducing my monthly student loan payments and I think that I qualify. I made just over $32,000 last year, and I am drowning under my monthly loan payments, which all together total over $800 a month. That’s more than my rent and utilities combined!

I’m wondering though what happens since I have loans from multiple sources. I have three loans with Sallie Mae and another loan with a different company, the name of which escapes me at the moment. Would I have to pay 15% of my salary on each? Or on all of them together? Thanks for your help!

Thank you for your email Richard. Wow, that is a lot of money every month! In fact, according to my quick calculations, it looks like you are probably spending about 40% of your monthly take-home pay just on your student loans.

As to your question, I have some good news. As long as your loans are federal student loans (Stafford, Perkins or, if you were in graduate school, Grad PLUS), the 15% will be based on your total amount of loans — not each one individually. You said most of your loans are through Sallie Mae, so those should automatically be calculated at the new amount once you apply for the program. They will send you a monthly bill equal to 15% of the amount by which your income exceeds the federal poverty level (currently $16,245).

Since you have another loan held by a different lender, you will probably need to fill out some paperwork, but ultimately your TOTAL payments should not exceed that 15% limit. Federal law requires lenders to share information about your federal student loans, so despite the bureaucratic headache, you should not be stuck with two separate 15% payments. Another option you might want to consider is loan consolidation. If you do that before signing up for the new repayment program you will only have one monthly payment to worry about.

By the way, my quick and dirty work with the calculator puts your new monthly payment at just under $200 — less than a quarter of what you’re currently paying. Wow, that’s a lot of breathing room!