Considering borrowing student loans for yours or your children’s education? Here’s the basic information you need to know:
Federal Student Loans aren’t always superior.
Long ago, private student loans were awarded in ridiculously high amounts and interest rates varied, meaning over a 10-year repayment period you could have a 4 percent interest rate at times and a 12 percent interest rate at other times. Payments could not only top $1,000 monthly but could also vary by hundreds of dollars because of the interest rate changes.
Now, private student loans are available in fixed interest rates that don’t change and are often less than the parent PLUS loan interest rate. Compare federal parent loan rates with rates granted by lenders such as SoFi.
You can’t deduct the interest paid on your tax returns, but you can claim the American Opportunity Credit on your federal income tax return.
There is a big difference between loans awarded to students and those awarded to parents.
Federal student loans, for the most part, are awarded to students that aren’t awarded to parents. Parent PLUS loan interest rates are higher than traditional undergraduate student loans, income-driven repayment plan prices are higher, and the only limit is the cost of attendance.
For instance, let’s say a school costs $30,000 per year to attend including room and board, textbooks, etc. The limit for dependent undergraduates for the first year is $5,500. Parents can borrow $24,500 without having to show that they can afford the payments based on their income. Thus, a parent could easily end up with $100,000 in debt from a child’s undergraduate degree.
Credit rating and income determines eligibility for private student loans.
Whether the private loan is to parents or students, credit rating and income do matter. Students getting a loan in their name with limited credit history may get loans with a parent or other more credit established cosigner. A cosigner is someone who agrees to repay the loan if the primary borrower can’t. Thus, they are equally responsible for the loan and loan payment history also goes on the cosigner’s credit report.
Credit rating may also determine interest rate. For instance, someone with a better credit score may qualify for an interest rate that is two percentage points or more lower than another person’s with a lower credit score.
There are different types of federal student loans
Fro students, most federal student loans are either issued as subsidized or unsubsidized loans. Interest on subsidized student loans is paid by the federal government while students are in school with at least half-time status and a few circumstances. These loans should be used to their limit before taking any other type of student loan.
Unsubsidized loans are available for the remaining amount a student is eligible to receive within normal borrowing limits. Gaps are filled with parent PLUS loans or graduate PLUS loans. Private student loans are also gap fillers. Remember, you never have to borrow the full amount awarded. I can’t stress this enough. Compare financial aid packages and call the financial aid office to apply for more scholarships and ask about local and department scholarships as well. If you’re still in or recently in high school, ask your high school counselor for help with finding scholarships.
Repayment length and terms vary.
Repayment time frames range from 5 years to 30 years. Five-year repayment is only for private student loans, but it depends on the lenders. Some lenders will have an option of a 15-year repayment term. Longer repayment time periods generally mean smaller payments. While you will pay more interest because you’re borrowing for a longer period of time, you can always pay off the loan early. Generally, there is no penalty for doing so.
The standard repayment time for repaying federal student loans is 10 years and up to 20 years for a plan where payments are based on income. There are consolidated loans with repayment time periods up to 30 years with the payment never rising based on increased income. But there is a huge drawback to this option. You are ineligible for Public Service Loan Forgiveness, a program where you can potentially have your remaining balance forgiven for working for a public service employer for 10 years Private student loans do not have this option or guaranteed options for repayment in the case of economic emergency.
Sound complicated? It can be. Student loan borrowing is a decision that involves comparing interest rates, long-term protections for financial emergencies, and avoiding overborrowing. The best way to make the decision easier is fill out the FAFSA so you know all the federal options awarded to you. Then talk to your financial advisor and a college financial aid counselor or a high school counselor about what your options could mean to your family’s future. It’s better to spend a couple of hours making an educated decision on borrowing now than spend years of worrying about the financial impact of loan payments later.