Some questions to consider when evaluating student loan options
There are so many options for finding funding for your college tuition, it could be quite an intimidating prospect.
Millions of students and their families have had great success in navigating the overall process and can you too. Additional to savings, grants and scholarships, there are alternative options available to students and their families in helping to bridge the gap between what they can afford to pay for college and total cost of attendance.
How does one learn of the different federal and private loans options available? How do you know which ones are best for you?
What will the loan cost? It’s important to look at the various factors that will affect your monthly payment. Interest rates and fees, as well as the overall cost for the life of the loan are other factors to consider.
Direct Federal Loans are administered by the government and include Unsubsidized, Subsidized, Perkins and PLUS loans. Direct Federal Loans have a fixed interest rate for the life of the loan – regardless of your credit.
Private lenders and Banks are two institutions that make these loans available. Their interest rates can be fixed and variable – this would vary by the lending institution and loan type. Fixed rates stay the same, while variable rates change periodically (e.g., quarterly or annually) over the life of the loan. Private loans are usually based on the borrower’s credit history, and/or cosigner’s credit history if applicable, each borrower have different rates.
Most student loans, the interest begins accruing with the first disbursement and is added to the principal balance, at the end of periods of deferment, grace and forbearance. Federally Subsidized and Perkins loans are unique in that the government pays your interest while payments are deferred, helping to reduce the cost of the loan.
Fees can also affect your loan. Most federal student loans have origination fees – with the exception of Perkins loans – while most private student loans don’t. Origination fees are a percentage of your loan amount and deducted from your disbursement so you receive less than you borrow.
Once you are approved for a loan and have your interest rate, you can use an online calculator to figure out what your monthly payments will be, as well as the total cost of the loan. If you have additional questions, call your lender or servicer for assistance.
Will I qualify?
Federal and private student loans have different qualifications for the borrower. For federal student loans, eligibility is based on financial need as determined by the information you provide on the Free Application for Federal Student Aid (FAFSA).
Federal Direct Unsubsidized, Subsidized and Perkins loans are for student borrowers and do not require a credit check. Federal Direct PLUS Loans are for parents and graduate students and will take credit history into consideration. For Direct PLUS Loans, borrowers with an adverse credit history may be required to add an endorser.
Private student loans are made by private lenders and a credit check is required. Some lenders may require a creditworthy cosigner. If a student does not have a strong credit history, adding a cosigner even if it’s not required may increase the likelihood getting a lower interest rate.
How much can I borrow?
For first-year undergraduate dependent students, the maximum amounts for Federal Subsidized and Unsubsidized Direct loans for 2017 is $5,500; independent students can borrow up to $9,500, with no more than $3,500 of that amount in subsidized loans. The Department of Education provides a complete chart that breaks down amounts and total loan limits for each year of study.
Some families are also eligible for Federal Direct PLUS Loans to help pay for college or graduate school. The annual loan limit is the cost of attendance (as determined by the school) minus any other financial aid received.
Similar to PLUS Loans, most private student loans have an annual loan limit equal to the cost of attendance minus other financial aid. The aggregate loan limits for undergraduate students are lower than those for graduate and professional students. Aggregate loan limits include all student loan debt (i.e., federal and private loans), which helps prevent over-borrowing.
What are the repayment terms?
Federal and private loans generally offer in-school deferment of payments while enrolled at least half-time and a 6-month grace period during which payments aren’t required.
These terms can vary by loan type so be sure to double-check them. Making small monthly payments or lump sum payments while still in school can reduce the amount of interest you pay have to back and lower the overall loan cost. There are never penalties for making prepayments.
After the grace period, standard repayment on a federal loan is 10 years; however, there are a number of repayment options that can stretch the term out as long as 30 years.
Federal loans also have loan forgiveness programs and income-driven plans available, which are not offered for private loans.
For private loans, repayment term length varies by lender and generally ranges from 10 to 20 years. Both loan types have interest rate discounts for making automatic payments, but private loans may also have unique rewards programs. Keep in mind that the longer it takes to pay back a loan, the more in interest you will pay.
What happens if I can’t afford the monthly payment?
It’s hard to predict what your financial situation will be after graduation, but there are programs in place to help you should you have trouble making payments.
For federal loans, you can switch repayment plans that extend the loan term up to 30 years, which will reduce your monthly payment. There are also loan forgiveness options for some public service positions, as well as income-driven repayment options.
Private loan lenders may also have programs to reduce payments should you need help. Check with each lender for specific details, and keep in mind the longer it takes to repay a loan, the more you’ll pay in interest.
There are deferment and forbearance options for both loan types to temporarily postpone your payments, such as if you return to school, have a period of unemployment or economic hardship or if you are on active military duty. Interest will continue to accrue even though payments won’t be due, which may increase your payment amount when it’s time to resume payments.
No matter the loan type, anytime you find yourself struggling with payments, contact your servicer immediately — the sooner, the better— to go over your options.
Understanding the student loan options might seem intimidating at first, but by educating yourself about these key areas, you can make an informed decision and confidently move forward with a plan to pay for college.