Student loans have become a fundamental part of college education for American students. A survey commissioned by the Institute for College Access and Success indicates up to 70% of graduates polled had a student loan debt in 2014. And unfortunately, the size of the debt continues to rise. On average, a student loan is in the region of $28,950, which is a 50% increase from 2004.
Before applying for a student loan it helps to fully appreciate how they work to avoid ending up with a lot of debt at a young age, which can be difficult to pay back.
Here is an overview of how to navigate the wide-ranging issues that relate to using student loans:
1. Private vs. Federal Student Loans
Students (or their parents) have the opportunity to apply for either a private or federal student loan.
The private loans are available from private lenders like banks or similar institutions. The eligibility and interest rate is based on your past credit rating. For help in applying for this type of loan it is possible to apply with a co-signer, such as a parent or guardian. This type of loan isn’t the most attractive for every student because it can come with higher interest rates and less favorable repayment terms compared to the federal loan.
The federal loans are issued by the federal government and virtually any student is free to apply provided they have a high school diploma. Federal loans are split into three specific types: Perkins loans, direct PLUS loans (for graduate students and parents), and direct loans.
2. Complete A FAFSA
Before applying for a federal loan it is a requirement for students to complete a Free Application for Federal Student Aid (FAFSA). The function of the FAFSA is to help the government determine an applicant’s ability to cover future schooling costs. Any further assistance can be provided via scholarships, grants, and loans. Also, there is the option to apply directly to the banks or other financial institution in order to organize the require financing.
3. Financial Aid Award
A financial aid award letter is generally received by students once accepted into a preferred college. In addition to the free money, such as grants and scholarships, the financial aid awarded in these packages relates to the loans which must be paid back over time.
Even though you might be entitled to borrow a certain sum it isn’t a requirement to make full use of the amount offered. Any surplus money from the loan can even be paid back to your school provided this takes place within a period of 120 days.
4. Interest Rate Charges
The interest rate charges can activate from the date the loan is first received. This interest rate applied to the loan is essentially a charge for borrowing the money for a set period of time. Interest rates on the federal loans are set by Congress on an annual basis, while the interest rates on the private loans are based on the co-signers credit score and the current condition of the economy.
The interest starts to be applied to the students account once the loan is received. On the subsidized federal loan, the government pays the interest up until the time the student graduates, when it then becomes their responsibility. But for those students with an unsubsidized loan, they are not able to benefit from this type of assistance and have a much larger loan balance to pay back after graduation.
5. Are Grace Periods Applicable?
Most of the student loans on offer have a grace period in place which means it isn’t necessary to start repaying the federal loan until 6-9 months after graduation. Grace periods are certain to differ with the different loan types, so it pays to carefully inspect the T&C of your personal loan. Also, the private loans can have a grace period, but the terms are generally less generous.
An unsubsidized loan will continue to charge interest throughout the grace period. For this reason, it can help to clear the interest on account before making the first payment to minimize any issues with the loan balance increasing.
6. What Repayment Options Are Available?
There is the option to have a plan that goes past the government’s traditional 10 year repayment time-frame. The 10-year plan is the default option, but there is the choice to look at different options when looking at the online exit counseling.
For the traditional plan, students are responsible for repaying the loan on fixed monthly bills that last 10 years. This can be quite difficult to afford, especially for those with a large outstanding balance. Other repayment options include those on federal plans that are income based and limit the loan repayments to 10-15% of the earnings.
For students on the private loans, the repayment options are generally less attractive. Should you start to get into difficulties with the loan, it benefits to get in contact with the lender to discuss alternative arrangements. For instance, some banks might make it possible to repay the loan with interest-only payments for a specified period.
7. Have the Federal Loan Forgiven
There is the possibility of having a federal loan forgiven if you are employed in a particular profession. For instance, after repaying the bill on income-driven repayment plans for 20-25 years, the outstanding balance can be forgiven. But, for those that work for a government agency, as a teacher, or at a nonprofit there is the potential to have the load forgiven after just 10 years because of the Public Service Loan Forgiveness program (PSLF).
Additionally, there are similar loan forgiveness plans for those students that signed up for a Perkins loan. Take full advantage of forgiveness plans and make sure to abide by the applicable guidelines to avoid missing out on significant savings.
If you have questions about your student loans or would like to learn more about consolidation, contact us today.