One of the biggest sources of financial stress that both parents and their children face is how to pay for college. Even when parents are diligent about saving money, rising costs of education can still make it necessary to take out student loans. Unfortunately, many parents and students take these loans out blindly without thinking about their real implications down the road.
Some of the key facts that individuals need to know about student loans before signing on the line include the following:
There are two primary types of loans.
Some loans are federal while others are private. Federal loans come directly from the government, and most individuals with a high school diploma are eligible to receive them. These loans may be paid by parents or can be borrowed in the student’s name.
To get federal loans, individuals need to complete the Free Application for Federal Student Aid (FAFSA), which determines student and parent contributions with loans, grants, and scholarships to cover the difference. Often, federal loans are part of a school’s financial aid package, so it is important to read the fine print carefully.
Private loans come from banks and other financial institutions, and individuals will need a good credit history to qualify. Unfortunately, these loans have fewer repayment options and often come with high interest rates.
Interest often begins accruing on loans immediately.
While Congress sets federal loan interest rates each year, private loans will offer various different interest rates depending on the market and the borrower’s credit history. Individuals should pay close attention to interest rates because interest will start accruing as soon as a loan disbursement is made to the school.
With subsidized federal loans, the government actually covers the cost of interest until the student graduates. However, many federal loans are unsubsidized, meaning that the amount owed at graduation will already be significantly higher than the amount that was initially borrowed. Private loans do not have interest subsidies. Students typically do not pay back loans until six to nine months after graduation because of a so-called grace period. Unsubsidized loans continue to accrue interest during this grace period.
Loans often come with a wide range of different repayment plans.
For federal loans, the typical repayment plan is based on 10 years of monthly payments. While this is the default setting, individuals can opt for something different to make payments more manageable.
One option for individuals in lower-paying careers is the income-drive plans, which cap the bill at a certain percentage of discretionary income, usually ranging from 10 to 20 percent of earnings. Individuals can also stretch out their repayment for a longer period of time to lower the monthly bill. However, this latter strategy means paying more interest over the life of the loan. Private loans tend to have fewer repayment options, but lenders are generally willing to work with graduates to figure out something that works for both parties.
See if a forgiveness program exist for your profession.
One of the most important things to know about before signing for a student loan is the existence of forgiveness programs. With the income-drive repayment plans, the remaining balance is forgiven after 20 to 25 years of consistent payments for anyone who qualifies for this sort of program. However, a Public Service Loan Forgiveness option exists for teachers, nonprofit employees, and workers at government agencies. This program forgives loans after only 10 years and is meant to encourage individuals to pursue these professions without worrying about how they will afford their loans.
In addition, forgiveness programs exist for people who qualify for Perkins loans, a certain type of federal loan. When using these programs, it is important to read the fine print carefully to avoid missing out on the great opportunity.
Save on interest by refinancing.
Once students graduate, they may want to look into refinancing and consolidation programs to get better terms on the debt. A number of trusted companies, like CommonBond, SoFi, and Earnest, have sprung up in recent years to help with student loan refinancing. Importantly, these programs are typically only open to people with excellent credit who have steady income and great credit scores. Because of the possibility of savings thousands of dollars in credit, however, it is worth applying to see what one qualifies for.
When looking at options, it is important to be critical of deals that seem too good to be true with a number of less reputable companies trying to take advantage of desperate debtors. If companies are putting pressure on a repayment plan that costs money to enroll in, chances are they are not legitimate.
Get organized immediately after graduation.
Because a number of different companies can service federal loans, individuals may have several different checks to write each month, even if they only took federal student loans. The situation gets even more complicated when private loans come into play.
To ensure that they do not miss any bill, debtors should make a list of all the companies they owe money to with a list of the minimum monthly payments and due dates for all. A great resource is the National Student Loan Database at nslds.ed.gov, which can help see all guaranteed loans, whether federal or private. Individuals access this database using the same pin they created to fill out and submit the FAFSA.