Students and parents spend hours researching colleges, looking for
scholarships, and trying to find the silver bullets to lower what they will pay for
college. As more families need to borrow money to attend college, more time
must be spent on the “HOW” you will pay these expenses. The importance of
your student loan structure will determine your repayment options, loan
forgiveness, credit score, and who is legally responsible if a default should
occur. These student loan decisions will impact students' and parents’ lives
for the next 10 to 30 years. Getting the loans is often not the problem. It is a
future repayment that needs to be more transparent.
The need for more information and complications is growing. Below, we listed
what you need to know to help you better understand your student loan
options.
Types of Federal Student Loans
Most undergraduate students are limited to only $27,000 to $35,000 of federal
student loans. The federal direct student loans are the legal responsibility of
the student to pay back. If additional student debt is needed to fund a
shortfall, a parent or other person will be directly or indirectly responsible for
those loans. This other person must co-sign or sign for the additional student
loan. It is also essential to understand that these loans have annual loan
limits. When creating a four-year college borrowing strategy, a family must
consider their current savings, yearly cash flow, and loan limits to properly
create the best student loan structure.
For post-graduate studies, the student could qualify for federal loans up to the
cost of attendance. As more careers require post-graduate studies, this
planning needs to be considered. Undergraduate federal loans have a much
lower interest rate and fees than federal graduate loans. This loan decision is
another example of the importance of your student loan structure.
Federal Direct Subsidized Loan (Stafford)
The government offers Federal Direct Subsidized loans to help students pay
for an associate degree, undergraduate degree, community college, trade,
career, and technical schools. The loans require the student to have financial
need, and the subsidized amount you receive can’t exceed your financial
need. The U.S. Department of Education will pay the interest on a Direct
Subsidized loan while you are in college, and repayment will begin six months
after you leave school. Loans issued after 7/1/2012 will have the interest
charged to the loan one month after you graduate or stop going to school.
There are benefits to the Federal Direct Subsidized loan. This loan will
maintain its interest-free status while the student is in school and some loan
repayment methods. This loan option would include undergraduate and
graduate studies. An added benefit is that it is the student’s responsibility to
repay this loan. A parent does not need to co-sign for this loan.
Families must understand that to qualify for this loan, the student must
complete a FAFSA form based on their filing status.
Federal Direct Unsubsidized Loan
The government offers Federal Direct Unsubsidized loans to help students
pay for an associated degree, undergraduate degree, community college,
trade, career, and technical schools. These loans do not require a student to
have financial need. This loan is the legal responsibility of the student and not
the parent. You only need to submit the current year’s FAFSA form to qualify
for this loan type. The interest on a Direct Unsubsidized loan will be
charged while you are in college, and repayment will begin six months after
you leave school.
This loan will always be charged interest, but you can defer payment when
enrolled in a qualified program.
Interest Rate & Loan Limits
The Direct Subsidized and the Federal Direct Unsubsidized Loans have a
fixed interest rate that changes on July 1 st of each year. The interest rate is
fixed for the life of each loan. This process is why a student may have
different interest rates depending on the types of loans taken out each year.
The rate will change if the loans are consolidated.
What often needs to be discussed is that there are specific limits to the federal
loans the student can obtain in their name. The loan limit is based on the
student’s academic progress toward graduation by year. For example, a
dependent, first-year undergraduate student has an annual loan limit of at
most $5,500. As part of that annual $5,500 total, the need-based student
could qualify for $3,500 of Subsidized Direct Loans if eligible.
Parent Direct PLUS Loans
Parent Direct PLUS Loans are federal unsubsidized loans funded through the
government and given to parents of dependent students to pay for college.
Parents cannot use them to fund graduate school. The interest is charged to
this loan while the student is in school. Although the Parent PLUS loan will
always be charged interest, you can defer payment while the student is
enrolled at least half-time in a qualified program.
Parent PLUS loans do not require the student to have financial need. To
qualify for this loan type, you must submit a current-year FAFSA form and not
have any recent payment delinquencies over 90 days old exceeding
approximately $3,000.
To qualify for this loan, the student must complete a FAFSA form based on
their filing status. Parent PLUS loan limits are based on the student’s financial
aid award. Suppose the parent is denied a Parent PLUS loan. In that case,
the student will qualify for an additional Direct Unsubsidized Loan, depending
on their academic progress.
The responsibility to repay the Parent Direct PLUS loan is the parent of the
student. It is the parents’ loan, not the students’. Many parents may take this
loan out with the intention of the student repaying this loan. Please always
keep sight of the fact that Parent PLUS loans are the parent’s legal
responsibility.
Direct Graduate Plus and Direct Graduate Stafford
As stated above, graduate loans are becoming more common as more
careers require that level of education. There are two options to consider
when funding graduation school.
The first is the Unsubsidized Direct Graduate loan. These should be the first
loans considered since they have a better interest rate and lower fees. They
also have an annual limit of $20,500.
A Grad PLUS loan will be your next option if additional funding is required.
The Grad PLUS loans have the highest interest rates and fees of the federal
loans. The advantage of this type of loan structure is the repayment flexibility
and forgiveness options the federal loan contains. Private loans are another
option and may offer lower interest rates and fees but have limited repayment
flexibility.
In most cases, federal graduate loans can cover most of the cost, and they
are in the student’s name only. The problem is the administrative fees and
interest rates are much higher.
The most significant advantage is these loans are federal and carry the major
benefits of federal loans, such as better repayment options, loan forgiveness,
death, and disability coverage. When seeking a federal graduate loan, the
person must submit the FAFSA form yearly.
Creating a College Funding Plan
To identify any college funding shortfall, we recommend a family create a four-
year cash flow analysis of college costs and expenses. This approach will
improve your ability to implement a debt structuring plan and engage your
child in the estimated cost of their college education.
Part of this analysis must include reviewing the various student loan
repayment methods and identifying whether loan forgiveness is an option.
Because federal student loans are easy to obtain, students often do not
realize the number of loans necessary to pay for college or the impact this
debt will have on their lives when they graduate. Your student debt structure
will determine your loan repayment and forgiveness options.
All this can affect what their financial life will look like after graduation. Having
a student loan discussion as your child enters college will better prepare your
child for the economic realities of the world after graduation.
Preventing Excessive Student Debt
Our company’s mission is to solve the student debt crisis. We will only be
able to solve the problem if we prevent it. Having the ability to create a
customized plan based on your college award and a family’s resources is
essential. Instead of focusing primarily on admissions, a movement to
envision an outcome is part of our goal. Contact us if you are a student or
parent who needs help calculating the cost of college or possible debt
scenarios.
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