7 Things You Should Know About Student Loans
We all know the cost of higher education has spiraled out of control in recent years, which has led to the student loan bubble that we are now facing. Due to the high cost of college, most students – even those who receive other financial aid – will need to borrow at least some money for college. For many students, this amount is significant.
Students and parents (if they are co-signing) should make sure that they understand the different types of loans that are available to them, including interest rates, payment terms, and other conditions. They should also be aware of the potential consequences of defaulting on a loan, as well as what resources may be available to help them manage their debt most effectively – especially if they may have trouble keeping up with the payments later on.
Here are 7 things you should understand about student loans and higher-education loans before taking one:
1.) Subsidized Loans are a great option, but they are typically only awarded to those who show financial need.
If you qualify for a Subsidized (previously called Stafford) Loan, this should be your first source to borrow money for college. These student loans are highly favored because the federal government will pay the interest on the loan while the student is in college, so you will save quite a bit in interest charges over time. This is also a true student loan, meaning the loan is in the student’s name, and does not require a co-signer.
2.) Unsubsidized Loans are your next avenue for borrowing.
These are also true student loans in the student’s name. While the student does not have to make payments while he or she is in school, interest will begin accruing immediately upon disbursement of funds. The student can pay the interest while in school to reduce the capitalization of interest and thus save some money in the long run. If the interest is not paid, however, it will continue to accrue and increase the size of the loan every year, and can increase the cost of the loan over time.
3.) Be aware of your grace period.
Most lenders do offer a grace period before regular payments start. However, different lenders have different grace periods, so if you have multiple loans, be sure you have a record of each grace period, so you know when each repayment needs to start.
4.) Default – or failure to make your student loan payments – can have serious consequences.
Student loan debt is notoriously difficult (if not impossible) to get out of, so before taking on debt, make sure that you will be able to manage the payments. There are a number of consequences to missing payments on your loans. For some loans, additional fees and penalties may be added to your loan balance. It could also impact your credit score. Your entire loan balance plus interest may become due in full, and you may lose access to modified repayment plan options. If you are working, your wages may be garnished, and they can even withhold your tax refund! If you have a co-signer, they will also be impacted in all of these ways as well, so parents should be very cautious before signing for a student’s loan. (See this article for some tips what you should watch out for with Parent Plus Loans.)
5.) Be aware of your repayment options.
If you are unable to make your scheduled student loan payments, you should contact your lender immediately. There are often various options available to student borrowers, including restructuring your payment plan based on your budget, or changing your payment due date. Those experiencing financial hardship may qualify for deferment or forbearance. You may also be eligible for a Pay-As-You-Earn or Income-Based Repayment Plan. Some career fields such as healthcare or social services may also provide some student loan assistance.
6.) Consider consolidation.
If you have multiple student loans, keeping track of multiple payments, grace periods, and due dates can get confusing. Consolidating all of your student loans with one lender allows you to simplify and make just one monthly payment – plus you may also be eligible for a lower interest rate. However, keep in mind that consolidating your student loans could make you ineligible for some repayment assistance programs, so be sure you check into the consequences before consolidating.
7.) Do plenty of research first.
Before committing to a loan payment that may last for the next 10-20 years of your life, be sure you understand your options. You can learn more about student loans from the U.S. Department of Education, and you can also use the Department of Education’s Loan Repayment Estimator to calculate future loan payments and the total cost of your loan over time.
Bonus Tip: Beware of credit cards!
Credit cards are readily available (and aggressively promoted) to students, and they can seem to be a seductively easy way to pay for books and other living expenses once on campus. However, credit card interest rates are typically far higher than available student loans, and missing payments can negatively impact your credit score, causing future difficulties later in life, and possibly even making it difficult to find a job! Though you may want to do everything you can to avoid student loan debt, credit card debt can be far more dangerous for students, and should be avoided if at all possible.
If you have questions, we highly recommend you speak with an experienced college planning consultant who can make sure you are making the right choices for your family and your future. Contact us today for a free family strategy session where we can discuss your options for paying for college in an efficient and comfortable manner.
Image Credit: Photo by Nick Youngson CC BY-SA 3.0 Pix4free.
The information presented here is for educational purposes only and is not a solicitation for the purchase of any financial product. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting financial professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.