College Loans, Student Loans, Student Debt

When paying for college, my recent posts have covered scholarships and college savings accounts.  Now let’s turn to the last resort, college loans.  After you have selected an affordable college; been awarded grants, scholarships, and work study; paid what you can from savings to get the tax credits; and used part of your education savings accounts – you are left to fill the gap with college loans.  Since most grants go to lower income families, most middle class families should expect to pay for college primarily with private scholarships, family savings, current income, and loans for the rest.  You do have choices of loans:  student or parent borrowing, public or private college loans.

Federal College Loans

In fact, most college financial aid packages will include public loans for the student.  Public loans thru the government are usually preferable with lower, fixed interest rates, more flexible repayment options, forgiveness for service options, and no requirement for parent’s to co-sign.  There are several kinds of federal college loans:  subsidized loans for undergraduates based upon need, unsubsidized loans for any student, and subsidized loans for parents.  With “subsidized” loans, you don’t have to pay interest until after graduation.  The most common college loans for students are called “Stafford” loans and are limited to $5500 for freshmen in 2015 and higher amounts for upperclassmen.  These loan limits increase periodically.  “Perkin” loans are for students with exceptional needs and are managed by the school.  Parents can get public coolge loans called “Plus Loans” that require minimal credit checks, have a relatively low fixed rate, don’t require repayment until six months after graduation, have more flexible repayment terms, and can be forgiven if the student dies or parent becomes permanently disabled.  Some federal loans can be forgiven after periods of public service.  Get more details and the latest information about federal student loans at the agency’s website that manages them:  http://studentaid.ed.gov/types/loans/

Private college loans

Some federal loans limit the amount you can borrow, so your next resort to fill the gap is with loans from some colleges, Sallie Mae, or private lenders like banks and credit unions.  Sometimes advertisements for very low rates on private student loans look tempting, but it’s still preferable to review all your public loan options before exploring private loans.  The lowest rates only go to borrowers with high credit scores and are usually variable rates that will increase in future years.  Private loans usually have higher rates, less flexible repayment options, and require a co-signer.  If the student misses payments, even if unemployed, the co-signer is expected to make those payments and their credit score will be damaged.  Unlike credit card debt, it is rare for student college loans to be forgiven by declaring bankruptcy.  Still, if you have a high credit score, you sometimes can get a good rate even better than the federal PLUS rate.  Don’t forget to check your credit union when shopping for private or consolidation student loans.  Several websites help you shop for student loans including:

Other college loans

Other sources of college loans may be your state, non-profits, or charities.  Some states offer their own student loans with nice rates.  Examples of non-profits that provide zero interest student loans include the Military Officers Association of America, Abe and Annie Seibel Foundation, and International Association of Hebrew Free Loans.  Search for more under “0 interest student loans”.

Parents may also wish to consider borrowing from home equity lines of credit (which do not count against your financial aid as regular home equity loans do), or existing whole life insurance – but do NOT buy whole life insurance as a means to save for college which is much more profitable to the insurance agent or so-called “college financial advisor” than it is to you.

How much college loans can you afford

College loans are your last resort, but most students do need them.  The average debt for a 2015 graduate was more than $28,000, so you need to keep student loans under control.  Student loans should not exceed the student’s expected starting salary.  Parent loans should be able to be repaid within ten years or prior to retirement – whichever comes first.  Another measure is to keep the student’s monthly repayment amount to 10-15% of their expected first year’s salary.  Use the FinAid.org calculator to enter your major and other data to see how much your maximum, monthly payments could safely be:  http://www.finaid.org/calculators/scripts/sloanadvisor.cgi.

Every time you get a new college loan, know what your total debt repayment amount will be.  Even as they grow, loan amounts may seem so huge and far away as to seem rather abstract.  But once you convert that abstract loan amount to an amount you will have to repay every month for years and years, they may seem more real. Then you can calculate just how easily college loans could be paid – along with all your other expected expenses.  Getting student loans means the ludicrous situation of borrowing money without actually knowing that you can make the monthly payments.  Nevertheless, don’t get any loan without knowing how much your monthly payments will be and that it will fit within your likely monthly budget based upon your expected job.

http://www.finaid.org/calculators/ – Finaid has a couple of dozen different types of student loan calculators for every imaginable situation.

The first step in getting a federal loan and aid from a college is to complete the online form, “Free Application for Federal Student Aid (FAFSA)” which is used by all colleges as the first step in evaluating potential aid. Read more at https://www.creditloan.com/student-loans/fafsa-guide/

 

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