First, will be okay...eventually...

I know, it all sounds impossible. But more people are going to college than ever. And while many of them are accumulating debt faster than Congress, you can still get through this without an impossible financial burden. Just remember, that there will likely be no single source of money, you will have to be realistic on selecting the right school, and your major means everything. So, relax and start the journey, one step at a time...

Tuesday, August 23, 2011

What You Need to Know about Student Loans

When you add up your savings, scholarships, grants, work-study, and family contributions, you may still not have enough to pay for tuition, fees, and room & board. That's where loans can fill the gap, if you are careful not to overburden the student (or parents) with debt. There are two general rules of thumb to remember here: (1) Avoid taking on more total debt to get your degree than what you expect to earn your first year in your chosen field after you graduate (given there are good job opportunities in that field), and (2) parents should provide themselves an adequate retirement fund first before funding student loans, as there are no loans for retirement.

Current trends for college funding show disproportionate increases in both student loans and number of students receiving aid. So a student loan may just be in your future.

From: National Postsecondary Student Aid Study
(Click to enlarge graphic) 

There are three major categories of education loans: federal student loans where student borrow the money, federal parent loans (PLUS loans), and private student loans. For the federal student loans there are need-based subsidized loans (Perkins loans for extraordinary financial need as well as Stafford loans) and un-subsidized Stafford loans.

The Federal education loan programs offer lower interest rates and more favorable terms than typical consumer loans. You can also deduct up to $2,500 in student loan interest on federal income taxes, whether or not you itemize deductions on your return (see IRS Publication 970).

As of July 1, 2010, all new federal education loans (federal Parent PLUS loans in addition to student loans) are made through the Direct Loan program. The loans are made through the college's financial aid office, funded by the Department of Education. The terms of the Federal Stafford and PLUS loans are similar to the terms of the previous federally-guaranteed student loan programs, and the interest rate on the Federal Direct PLUS loan is lower (6.8% vs. 7.9%)  with a higher approval rate (though current undergraduate rates have been lowered to 3.4% for Direct Subsidized Loans for undergraduates with a first disbursement date between July 1, 2011, and June 30, 2013). Detailed information on federal loans is available in this document from the federal government.

Key points for student loans:
  • In general, student loans are not dischargeable in bankruptcy; that is the obligation will not be erased as a result of bankruptcy, unless undue hardship may result. Discharge or cancellation is possible due to disability, school closure, identity theft, etc.
  • Fill out the Free Application for Federal Student Aid (or FAFSA) every year and as early in the year as possible (see previous post). Without it, you won’t have access to federal student loans, need-based or not.
  • Always use federal loans first (Perkins, Stafford, and PLUS loans), as they have lower interest rates and often have more favorable terms than private loans.
  • Be watchful for student loan scams, including people willing to take your money to fill out loans forms, find you loans, or help consolidate your loans. Be watchful for identity theft, as well.
  • Get a copy of your credit report before you apply for any loan, to make sure there is no innacurate information on your report. You can get one free credit report per year here, as required by the federal government, in accordance with the Fair and Accurate Credit Transactions (FACT) Act.
  • A student may need a co-signer to be approved for a private student loan.
  • Some private loans have variable interest rates, while federal loans have fixed interest rates and better repayment terms. Understand all the terms of any loan (interest rate, fees, term, and when repayment must start) before you sign. A good first source for private loans is a credit union, if you are eligible.

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