Student Loans 101
Whether your child is just starting college, or you’re looking for some new ways to pay for school, we’ve got you covered! Let’s get right to it: we’re going to talk about student loans. As Dave Ramsey says, there are hundreds of ways to pay for college, but you’re relying on your savings to pay for retirement. So while using your retirement may seem tempting, a student loan 9 times out of 10 is a better choice for your long-term finances.
There are hundreds of ways to pay for college, but you’re relying on your savings to pay for retirement.
When it comes to student loans, there are 3 main types:
Federal
Private
Refinanced
Depending on your personal situation, one type may work better than another. Let’s jump in!
Federal Loans
It all starts with FAFSA. The (FAFSA) Free Application for Federal Student Aid is a document that helps the government establish your financial needs. There are 4 main types of federal loans, and your situation may help you lean toward some options more than others.
Direct Subsidized
With a Direct Subsidized loan from the federal government, you’ll need to demonstrate that you need financial help to cover the cost of college. The school decides how much you can borrow , and your loan can not exceed your financial need. For example, if tuition is $5,000, you cannot borrow $6,000 to include your apartment off campus, books, and living expenses.
The school decides how much you can borrow , and your loan can not exceed your financial need.
These loans are specifically for undergraduate students, too. One benefit of Direct Subsidized loans is that the U.S. Department of Education will pay the interest on the loan as long as you’re in school at least part time, for the grace period of 6 months after leaving school, or during deferment.
Direct Unsubsidized
Direct Unsubsidized loans are not based on financial need and can apply to undergraduate, graduate, and professional students. The school determines the amount that can be borrowed based on your other financial aid and the cost of attendance.
The school determines the amount that can be borrowed based on your other financial aid and the cost of attendance.
Unlike a subsidized loan, you must pay interest continuously with a Direct Unsubsidized loan. If you choose not to pay the interest as it accumulates, it will be capitalized.
Direct PLUS Loans
Direct PLUS Loans are for graduate or professional students or for parents of dependent undergraduate students. Like the Direct Unsubsidized loans, there is no financial need requirement, however unlike Direct Unsubsidized, there is a credit check.
If you don’t have great credit, there may be additional requirements set for your loan. Direct PLUS loans have fixed interest rates and aren’t subsidized, meaning interest will be accrued while in school. There are also Direct consolidation loans to combine all your student loans into one - we’ll talk about this more when we discuss consolidation options.
Advantages of Federal Loans
Your Interest Rate is Typically Lower than Private or Credit Card Loans
No Cosigner or Credit Required
You Can Begin Paying Your Loan Post-College
There are Flexible Repayment Options
Depending on Your Career Field, Your Job May Offer Some or Complete Loan Forgiveness
How to Apply
To apply for a federal loan, you’ll begin by filling out the Free Application for Federal Student Aid (FAFSA®). Next, you’ll go through entrance counseling to ensure you understand the terms of your loan and repayment expectations. Lastly, you’ll sign a Master Promissory Note that serves as your agreement to the loan.
Private Student Loans
If your federal loan doesn’t cover enough of your costs, or you're looking for another option for student loans, private student loans come in an array of options.
There are many circumstances where you may choose a private loan instead of or in conjunction with a federal loan. These may include:
To Pay for the Bar Exam
International Students
Medical School/Residency
You Have Bad Credit
You Don’t Have a Cosigner
*For the bar exam and medical residency, there are no options for student loans, so private loans are the only way to go
Advantages of Private Loans
Some advantages include:
Loans are Not Based on Financial Need
Refinancing is an Easier Process
Your Interest is Tax-Deductible
No Prepayment Penalties
If you have good credit, your interest rates could be competitive with the Federal rates
Refinancing Loans
To refinance your loan, you’ll likely need good credit and to wait until after graduation. There are two main types of refinanced loans:
PLUS Loan
The PLUS loan was mentioned earlier, and it is where the U.S. Department of Education is the lender. A credit check is conducted. The maximum amount is the cost of attendance and other financial aid. This is a good option for parents of undergraduate students and graduate or professional students who used the Direct Loan option.
Private Refinancing Loans
Each private institution will have its own criteria and uses your circumstances to decide your interest rates and payment options. To further explore what types of refinancing you may qualify for, check out this student loan refinancing calculator.
According to Forbes, you can save over $30,000 over the life of your student loan by refinancing!
Advantages of Refinancing
One Loan versus Many Different Loans
Lower Interest Rate
Lower Monthly Payments
Pay off Faster
No Limit to How Much You Can Refinance
Conclusion
As the cost of tuition rises, scholarships often fail to entirely pay for college. Student loans can help you get that degree while planning for your financial future. Talk to a financial advisor at your university to help decide the best path for you.
TMI? Here's a cheat sheet infographic:
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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.