Student Loans 101
Welcome to student loans 101. Receiving a post-secondary education or learning a professional trade is of great importance for many people. We all strive to get into the best schools possible, hoping to earn a degree or learn a skill that we think will set us up for life. However, things are not always that simple. Most people do not come from a wealthy background and are not afforded the luxury of breezing through college drinking cocktails and discussing current events while mommy and daddy pay for school. It is exciting to see hard work rewarded in the form of scholarships awards and grants, however, these awards can leave you under budget and searching for additional funds.
This takes us to the main issue at hand – Tuition. Depending on what program young people want to enroll in; from career schools to public colleges and universities to private institutions, tuition can vary quite a lot. Some of the factors that may influence your final bills include:
- Tuition Type- According to The College Board, the average cost of tuition for the 2015-16 school year was $9,410 for residents and $23,893 for non-residents at a public college/university. A private college education, while providing great opportunities and connections in the long run, averaged $32,405.
- Room & Board- In addition to Tuition there are significant fees associated with yearly housing and meals. The average cost of living on campus for the 2015-16 school year was $10,138 at four-year public schools and $11,516 at private schools.
- Books & Supplies- The College Board reported that the average cost for books and supplies for the 2015–2016 school year was $1,298 at public colleges/universities and $1,249 at private colleges.
In addition to these fees, there are a number of miscellaneous spending items that can add on to these already huge numbers, leaving many young people with the obvious choice – STUDENT LOANS.
Do your homework before applying for a student loan
Not all types of student loans are created equal, and regulations are different for every single one of them. If you want to embark on a journey of higher education, you can go three ways – federal, private or a combination of both.
Federal Student Loans are loans that are given directly to a student and are funded by the government; they are Direct Subsidized Loans and Direct Unsubsidized Loans, Direct PLUS Loans, and Federal Perkins Loans. Direct and Perkins loans offer great repayment options and quite low interest rates. Applying for and receiving these loans do not require the applicant to provide collateral or have a credit check performed. Direct PLUS loans, otherwise called Parent Loans for Undergraduate Student. They are created to help parents fund their dependent student’s education and are also available to graduate/ professional students.
Two of the benefits to Federal Student Loans are that there are a number of options for Loan Consolidation & Loan Forgiveness when you reach your repayment period. By consolidating your loans you reduce your interest rates, as well as, your monthly payment. If you are thinking about working in a public service field or as an educator, you may be eligible for loan forgiveness. While this is not a consolidation, it might give you the chance of either reducing your loan drastically. In other circumstances such as disability, school closure and various other situations you may qualify for your federal loan to be forgiven, canceled or discharged.
Direct Subsidized Loans and Direct Unsubsidized Loans (also known as Stafford Loans)
Are the most common type of student loan encountered. If your loan is subsidized, you will not have to worry about paying it until after graduation. The current interest rate for Direct Subsidized loans is 3.76% and is paid by the government while you are in school. Subsidized loans require students to provide proof of financial hardship. For undergraduates, the sum received is highly dependent on the year they are in. The possibility to receive more than $23,000 in total subsidized student loans as an undergraduate is very slim and varies on the student’s status as a Dependent or Independent Student. Students in graduate programs or professional programs are not eligible to receive Subsidized Loans.
In the case of unsubsidized student loans, you are only required to pay the interest while you are in school. The current interest rate is 3.76% percent for undergraduate students and 5.31% for graduate students. You may choose not to pay the interest while you are in school, however, your interest will accrue and be capitalized. Unsubsidized loans do not require students to provide proof of financial hardship. Dependent Students can receive up to $31,000 and Independent Students can receive up to 57,500 in undergraduate unsubsidized loans. Graduate/ Professional Students up to $138,500 in unsubsidized loans (this includes all Federal Loans- Undergraduate and Graduate) You can apply for both type of student loans. However, keep in mind that if you receive a larger subsidized amount, your unsubsidized one will be smaller, and vice versa.
Perkins is only available for those who show extreme financial needs, and only a fixed amount can be borrowed – $5,500 a year for undergraduates and $8,000 for graduate students. Not all schools participate in the Federal Perkins Loan program. The fixed interest rate in this case is 5%, and they are all subsidized. The Federal Government is responsible for paying the rate while you are enrolled and for a period after you graduate.
PLUS Student loans
This type of loans is both available for graduate/ professional students and undergraduate parents, and is funded directly by the federal government. This loan can be used to pay for items other than tuition. There is no maximum amount received, and the interest rate is 6.31%. In addition to the interest rate, a disbursement fee is applied and deducted from monies distributed.
Private Student Loans are loans that made by various lending institutions- banks, credit unions, agencies or schools. They are good options in case other forms do not cover all education related expenses. Since they are not funded by the government, but by private means. Private Loans are very similar to the types of personal loans that you may take to buy a house or car. They do require credit checks, and a good credit score will lead to you qualifying for larger sum, with better rates.
Keep track of your student loans and you will not drown in them
Staying on top of everything loan related is not hard. You just need to keep everything organized.
- Keep track of your balance, lender, and payment status, even if you are still in school.
- Remember your grace period so you know when to make the first payment
- Keep your lender close. Inform them of any changes in address or phone number. Read every piece of information you receive regarding your student loans – electronic or otherwise.
- Inform yourself of specific repayment options and pick the best one for you.
- Pay in advance if you can – getting a part time job while in school might help you here.
- Don’t make any unnecessary expenses
- Apply for a consolidation method – this allows you to have all loans merged into a single one for a better organization. You will only have to make one monthly payment.
- Do not consolidate federal student loans into a private one.
- Be careful about losing benefits, and shop smart for a fixed interest rate.
- Switch to paying every two weeks instead of monthly. It will reduce the interest rate.
- Apply for a reward program that some lenders may offer.
Be proactive when planning the repayment of your student loans
Life after graduation can be difficult, with searching for a job, trying to be independent and debt free. You need to be intelligent and make a budget for yourself. There are two ways to plan for payment:
- The snowball method – list your debts from those with the lowest balance to the highest one. Make minimum payments on every important debt, and calculate how much you can apply towards paying the smallest one. This will give you a psychological boost.
- The avalanche method – list your debts from highest to lowest. Pay the minimum on all and send all extra money you afford to the highest debt.
Forbearance and Deferment
No matter how you decide to pay your student loans it is smart practice to avoid forbearance and deferment unless absolutely necessary.
- Deferment – you basically pause your student debt payment if you are not able to find a job. If your loans are subsidized, your interest will not keep adding, but, for unsubsidized loans, they will.
- Forbearance – is an alternative to deferment, for those with private education loans. It gives you the option to stop payments, or reduces them for a specific time. Keep in mind that interest will still add up.
Forbearance and deferment are life-line options for emergency life situations. In the case that you are not able to pay your student loans, both of these options are way better than the alternative of not paying at all. Keep in mind that forbearance and deferment can lead to an increase in your balance. You need to be careful here.
Student loans are quite intimidating at first glance but they do not have to be if you play it smart. All in all, receiving a post-secondary education or learning a trade outweighs the hardship you will encounter during the period after graduating. Our advice is to do your research on a student loan that suits your needs, go to college, and study to be the best version of yourself.