By Kim Parros and Liz Boyd
Love them or hate them, student loans are sometimes a fact of life. No matter how hard you have saved for college sometimes it's just not enough to pay the full tuition bill and then you realize that you need a loan. The majority of people don’t understand every facet about loans and this is a problem. Before we discuss loan options lets take a step back in the college planning process of trying to find a way to pay for college. This is one of our expertise areas and we spend hours and hours going over the full costs involved and analyzing our clients EFC (estimated family contribution) so that our clients understand what costs are involved. If you are not a client then you might get confused when you get your Award Letter.
Since there are multiple ways to pay for college, and we want to explore all of the options available to the student. Scholarships and merit aid are one way to go, and these can really help. But unless you are one of the very few lucky ones, the school won’t cover all of the cost to attend. This is when you are going to be confronted with loans to help pay for college. So, once you decipher your award letter, should you just accept what they gave you? Do you know the difference between subsidized and unsubsidized loans?
One of the biggest financial mistakes someone can make is not understanding student loans and what it can mean for their financial future, whether they are a parent or a student.
Let's talk about loan basics. We can start with Federal Student Loans:
- These are loans that are given to you by the government.
- The interest rates are generally lower and the rates are always fixed. Credit checks and cosigners are unnecessary; however, the maximum borrowing amount does depend on grade level and dependency state of the individual, plus the cost of attendance.
A few other things about federal student loans worth mentioning is that sometimes there are flexible payment plans or loan forgiveness plans that are available in some situations.
Private Student Loans, on the other hand, are when you take out student loans at a private bank. There are pros and cons to this method:
- The details can be more personalized to your situation with fixed rates as well as a variety of interest rates might be offered, especially if you have strong credit.
- In this situation, you are highly likely to need a cosigner. Both cosigners are legally responsible for the balance of the loan and there is no possibility of loan forgiveness. Whereas Federal Student Loans you may have those options.
The biggest difference between Direct Subsidized Federal Loans and Direct Unsubsidized Loans is that the department of education will cover the interest that accrues on your Subsidized Loan while you’re enrolled in school. It is also important to know that eligible undergrads have to show that they are in financial need to get the benefits of this loan.
The Unsubsidized Loan is not based on merit or need and is something that everyone can take advantage of. However, with Unsubsidized Loans, you should be aware that you will be accruing interest with these loans while you are in school and will have to pay that back yourself. Interest will also accrue during any grace period such as deferment or forbearance. With both loans, you must be enrolled in school as at least a half time student.
The next loan that is very important for you to understand is The Parent Plus Loan:
- You must be the biological, adopted or step-parents of the student going to college.
- Parents have to pay the loan while their child is still in college.
- The government does not offer a way to transfer a Parent Plus Loan to their child later on.
We strongly recommend against The Parent Plus loan every time and feel that this should only be considered as a last resort. If you want to know more reasons please feel free to contact us to discuss in greater detail.
Loans are sometimes the only way that a student can attend college, just look at the statistics: there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. Student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans. Borrowers in the Class of 2017, on average, owe $28,650, according to the Institute for College Access and Success. So as you consider how to plan for college, paying for it is a huge part of the process and Parros College Planning is here to help you along the way, starting as early as 9th grade.