On Tuesday, the Senate voted on the future of Stafford Loan interest rates. The rates for subsidized loans are currently at 3.4%, but without action from the government, will jump to 6.8% come July 1, 2012. A majority of 60 votes were needed to pass the bill which would lower these rates, unfortunately, the votes were split 52/45.

The issue between parties is not lower interest rates — most are in agreement that they should be lowered — it’s the how that’s keeping the bill from passing. The bill, written by the Democrats, attempts to close a tax loophole for high-salary workers in order to fund one more year of low-interest loans. However, the Republicans rather see this money come from elsewhere.

With both parties locked in a stalemate, it’s unclear how this issue will be resolved, but to learn more about the bill, check out this recent article from The New York Times.

Stafford loans offer forgiveness potential to many borrowers. Among those forgiveness conditions include becoming permanently disabled, if the school you were attending closed before you could complete your degree program, identity theft, as well as public service employees and teachers who meet certain criteria, but what about bankruptcy?

If the court makes a ruling that repayment would cause “undue hardship” than your Stafford loans can be forgiven. This is a rarity, but it does happen.

By definition a preferred lender list is a list of lenders that a college suggests its students consider when taking out federally guaranteed loans. Students who receive a “preferred lender” list from a school should remember that those lists are not legally binding. Borrowers can choose from any federally approved lender and may often find a better deal outside the list.

As some of you may recall a handful of lenders were sanctioned for deceptive loan practices a couple of years ago. Among other things, they were sharing a portion of their loan revenue with the school’s financial aid office, which is a clear code of conduct violation. These financial aid officers were guiding students toward loan products that would offer them kickbacks. Fortunately for students today these unethical practices have come to a halt.

Heavy fines were levied and the Sunshine Act was born. The Sunshine Act protects students and parents from exploitation by private lenders and lenders who offer gifts to colleges as a way to secure loan business.

Keep in mind it is not a violation for a school to have a preferred lender list provided they are not reaping financial gains. So it is up to you if you are enrolled at a FFELP school. You can thumb through the schools preferred list or travel outside that list in search of your own lender to service your Stafford loan and Parent Plus loan.

As G.I.Joe once said, “Now you know. And knowing is half the battle.”

Five most recent Stafford loan help blog posts:

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Monday Morning Rant…

President Obama’s recent plan to eliminate private lenders from the private student loan market would be damaging to students and take away a students right to choose.

At present there are two primary lending options for students; the government’s in-house program and private lenders such as Sallie Mae, Suntrust, Discover Student Loans, Wells Fargo, Bank of America, and Citigroup to name a few. Obama’s plan would move all federal loans such as the Grad Plus and Graduate and Undergrad Stafford loans over to the government’s in-house program leaving private lenders out in the cold.

The private sector has been supplying funding for students for years and now, by 2010, the government could pull the rug out from underneath them if Congress gives the O.K. This would have a crippling effect on the public sector costing thousands their job.

Having options is what makes this nation so great. If we didn’t have Burger King and Wendy’s than McDonald’s could charge $6 bucks for a cheeseburger with no competition. What kinds of fees will the government be attaching to these loans? What type of borrower benefits would exist? Private lenders help the student loan industry, not hurt it.

I don’t know about you, but I don’t want any one entity monopolizing the federal student loan industry. As a consumer I want options.

I have the utmost respect for teachers. My good friend Trisha is an elementary school teacher in the New Hampshire school system. She tells me it can be a thankless job at times; shaping our nations future leaders and doing so for minimal compensation. True, most teachers went into the profession knowing they probably weren’t going to be pulling in six figure salaries but that doesn’t mean they need to struggle so mightily to stay a float with student loan debt looming heavy over their head.

The good news is that both federal Perkins and Stafford loans offer loan forgiveness opportunities for teachers.

Perkins loans can be forgiven for full-time teachers who teach in one of the specified shortage areas or teachers in a designated elementary or secondary school serving students from low-income families.

Stafford loans can be forgiven for full-time teachers in a designated elementary or secondary school for five consecutive years serving students from low-income families.

To see if you teach in a specified shortage area (click here). To check to see if your school is considered a low-income school (click here).

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It’s not something that any of us want to think about, but it is a sad realty of life. If you take out a Stafford loan and something happens to you where you wind up permanently disabled or worse, the entire amount of the loan is forgiven.

I know when I was 18 I didn’t pay much attention to this fact, but when I went back to school at 30 with a wife and child I read the fine print. The last thing I wanted to do was put them in a bad situation if something unforeseen happened to me.

For a Parent Plus loan (which is a loan a parent takes out on behalf of the student), the forgivness extends to them as well in the event of death, but not in the case of permanent disability of the student for whom the parent borrowed the money for.

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It’s true; if you can secure a Federal Perkins loan through your school it is a better option than a Stafford loan. The Perkins Loan Program provides low-interest loans to help needy students finance the costs of postsecondary education. Perkins loans hold a fixed interest rate of 5%, while subsidized Stafford loan are at 5.6% for the 2009-2010 academic year and 6.8% for the unsubsidized.

The problem with the Federal Perkins loan, however, is that there are more eligible students than there are loans to give. Perkins loans are awarded through the school, and are part of a revolving loan fund. A revolving loan fund just means the available funds in the pool are dependent on former students who are paying back money from their Perkins loans from previous years. As a result the number of students who receive a Perkins loan from a school can change from year to year. Additionally, the Perkins loans are awarded on a first come first serve basis, which is why completing your fafsa early is pivotal.

Students can receive Perkins loans at any one of approximately 1,800 participating postsecondary institutions. Institutional financial aid administrators at participating institutions have substantial flexibility in determining the amount of Perkins loans to award to students who are enrolled or accepted for enrollment.

Borrowers who undertake certain public, military, or teaching service employment are eligible to have all or part of their loans canceled. Below is a list of loan discharge conditions for the Perkins loan.

The collateral damage which stems from not repaying money you owe to your school is worth far more than dollars. You can be certain the school will withhold your official transcript if you don’t pay up, which could pose major problems down the road.

Withholding your transcript would hamper your ability to transfer to another school, receive your diploma, and would most likely hurt your credit as it would be turned over to a collections agency. Also, if a potential employer calls to verify you graduated from that institution the school may not release/confirm the details with them, which certainly would not bode well for you. In this market employers can basically pick and choose their candidates, and that one strike against you could be your undoing regardless of how well your interviewed went.

It’s also good to know, however, that while the “official” transcript will be withheld you can still obtain a copy of your transcript. No institution can deny an individual access to his or her educational records.

Of course this can all be avoided if you pay your bill, but I know many are struggling right now. What I would suggest doing is consolidating your federal loans, if you haven’t already, and then deferring. You can defer federal loans for up to three years. This would at least serve as a temporary band-aid to your payment woes.

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If your school participates in the Federal Family Education Loan Program (FFELP) they are not permitted to refuse to certify a loan because of the lender the borrower has selected.

The law and regulations clearly prohibit institutions from refusing to certify a loan based on the borrowers choice of lender. Section 432(m)(1)(B)(ii) of the Higher Education Act of 1965, as amended (HEA). The Department’s regulations at 34 CFR 682.603(e) further provide that the limited authority under which a financial aid administrator may refuse to certify a Stafford or PLUS loan does not include the borrower’s selection of a particular lender or guaranty agency.

Furthermore, a school’s failure to comply with these requirements may result in the Department of Education imposing a fine or taking other administrative actions.

So if your FAO refuses to certify your loan based on the lender just quote the Higher Education Act of 1965. That will send chills down their quivering spine!

As of July 1, 2008, interest rates will be changing on federal student loans such as the Stafford loan. Here’s a quick rundown of the details:

For new Stafford loans:

• Subsidized: 6.0%
• Unsubsidized: 6.8%

For Stafford loans older than July 1, 2006:

• In grace period: 3.61%
• In repayment: 4.21%

For PLUS loans older than July 1, 2006:

• All older PLUS loans: 5.01%

If you’re just filing your FAFSA now, be aware that loan limits have increased as well; you’ll receive additional details from your school’s financial aid office in your award letter and financial aid package.