Student LoansPersonal Finance
The least desirable way to pay for your child’s graduate or undergraduate college education is borrowing the money. Unfortunately, most people will eventually need to borrow money to attend college. But they should always keep those loans under control. Excessive borrowing costs you substantially long term.
All Government loans are based on your eligibility for financial aid. This revolves around the document known as the Free Application for Federal Student Aid, or FASFA, in the United States. Completing the FASFA is required for financial assistance and most loan applications. Your FASFA application requires multiple documents: Social Security Number (or Alien Registration Number), last federal income tax returns, W-2s, income records, Bank statements, records of investments, and Records of untaxed income. The application itself will need to be filed within the first 5 to 6 month of the year. Early filings result in early approval decisions. Schools may require that you also file secondary applications with the university using private or specific application programs. You will reapply for financial aid every year.
The key to paying for college with low debt is grants and scholarships. Alternate solutions from friends, family, and jobs with tuition benefits should be sought afterward. Lastly, seek loans from the lowest fixed until the highest variable interest rate. Seeking your loans in order of lowest interest rate first helps you indirectly limit total expenses. This increases the chance you run out of tuition before borrowing higher interest rate loans.
The Perkins Loan is among the lowest interest available, charging a fixed interest rate of 5%. At times this will be the lowest cost available, at other times other loans will exceed these loans due to their variable nature. The interest is deferred or canceled while the student is enrolled, typically at least half time. A Perkins Loan can only be awarded via the financial aid system since it only dispersed to students who fit within certain lower income brackets. Loan amounts are limited both annually and totally. As of 2013 undergraduate students can borrow up to $5,500 each year. They can borrow a total of $27,500 total over their undergraduate career. Graduate students can borrow a maximum of $8,000 each year, and a total of $60,000 over their graduate career. The school can set limits lower than those levels.
If the borrower earns under $75,000 a year Perkins loans may be tax deductible. After graduation, the student will not have to make payments for some time. The school will receive your loan and apply it to 4 categories in this order: tuition, fees, room & board, and remaining school expenses. If the loan exceeds the balance the school may return the additional amount to you.
The Stafford Loan offers fixed loans for low rates as well. The interest on Stafford Loans is variable until July 1st each year when the rate for dispersed loans is set until July 1st of the following year. The maximum cap on interest rates is 8.25%. Until June 30th, 2014 the rate is a stable 3.86% for undergraduate students and 5.41% for graduate students. The rate is lower for students with a financial hardship and interest is paid while they are in college. For others, Interest will be deferred until after college. An origination fee of roughly 1% will be charged on the loan. This is removed from the loan itself and not paid directly by you. Borrowing has annual limits, stated below as of 2013:
|Freshman Undergraduate||$5,500 total; $3,500 subsidized||$9,500 total; $3,500 subsidized.|
|Sophomore Undergraduate||$6,500 total; $4,500 subsidized||$10,500 total; $4,500 subsidized|
|Junior/Senior Undergraduate||$7,500 total; $5,500 subsidized||$12,500 total; $5,500 subsidized|
|Graduate Student||N/A – Graduates Independent||$20,500 total; $0 subsidized|
|Total Undergraduate||$31,000; $23,000 subsidized||$57,500; $23,000 subsidized|
|Total Graduate||N/A – Graduates Independent||$138,500; $65,500 subsidized|
(Includes Undergraduate limits)
After graduation from any program with a Stafford loan, you will be given a 6-month grace period. Dropping enrollment or falling below half-time enrollment also triggers the grace period. After the grace period, payments are due monthly. Your total loan payment date is within 10 to 25 years.
Plus Loans are fixed loans with a 6.41% interest rate as of 2013. The maximum borrowing amount is determined by the school you attend. Loans are only available to parents of dependent undergraduate student, independent graduate students, and professional students enrolled above half-time. A loan origination fee of 4.204% is charged for Plus Loans. This is removed from the loan itself and not paid directly by you.
The two varieties of Plus Loan are direct subsidized and direct unsubsidized. Direct subsidized loans are only available to financial needs students. The number of time you can acquire for loans is limited to the duration of your program with a 50% allowance. If you’re in a 4-semester program, you can borrow for a maximum of 6 semesters.
Private student loans are issued by banks, lenders, and creditors. They should only be used if you’ve used the maximum lending from other sources. This will be the highest interest rate possible for student loans. Your interest rate will vary with your credit score. But the interest rate will almost always be higher than federal loans.
There are ways to reduce the level of interest from loans. Private lenders will give you discounts for correctly handling your debts. Payments that are regularly made on time can result in reduced interest rates.
Handling Student Debt
After completing a loan application, the first thing you should do is ensure that you have all the relevant information for your lender. Debts are sold and transferred often, so it’s paramount that you retain all correspondence from your lender during the term of your loan. You need to keep the lender’s name, address, account number, payment amount, the total amount of original debt, current balance, phone number, and email contact information. You should know when each payment date is monthly. You need to be able to reach them, and they must be able to reach you. Ensure that all lenders have current contact information for you.
Controlling your debt and keeping your financial future in order is paramount during college. Too much debt will make you spend the next decade financially underwater. Your loans should be compared against your ability to pay them in the future. Loan payments should be single digit percentages of your income. Avoid borrowing amounts that will result in paying double digit amounts of income or payment periods over 10 years.
If you cannot pay your debts, there are other options than the highly undesirable default. Defaulting is formally failing to pay for 270 days or more. There are major penalties for failing to pay. Your tax refunds will be withheld and seized as payment. You might be charged up to 25% of the loan as a fine. Substantial marks will be made against your credit record. You may also have wages garnished.
Your alternative options are restructuring, consolidation, and forbearance. All of these have long-term consequences. The restructuring will result in changes to your loan’s actual setup. You may have lower payments, but you will extend the length of time you repay the loan. This increases interest compounding and total debt paid.
Consolidation results in your loans becoming a single large loan. Government and private loans can be consolidated. Your loans will become one large payment each month, so you won’t have to worry about several checks. Short term loans consolidated will have their terms extended, resulting in higher total payments for those individual loans. The overall consolidated loan may result in lower actual interest rates, possibly reducing your total overall debt. When this occurs it is the biggest reason to acquire loan consolidations. If your total overall debt payment increases, you should not consolidate.
Forbearance, also known as deferral, delays repayment of principal and interest on your loan. You must request forbearance from lenders or loan services. Your lender will decide to provide forbearance if you have financial difficulties or illness. There are certain circumstances where they must provide forbearance. They are required to provide forbearance if you are in military service, medical residency, medical internship, or National Guard membership. If you are extended forbearance, your interest will still accumulate but you will be temporarily exempt from payments. This will result in higher total payment. You’re simply letting interest build for a period of time.
The best way to reduce the long-term negative effects of interest is by paying down your loans early after college. You will obviously have to make substantial budget sacrifices elsewhere. You should begin with the highest interest rates and move downwards. Since this is the most expensive debt, eliminating these loans first will have the most impact in decreasing your overall debt paid.
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