Student Loans: A (Sometimes) Necessary Evil
The myOptions Team
Scholarships, grants and work-study funds are always the ideal options for funding your college education, but what happens when you still have a balance after all of those things are applied? For many college students, student loans are a reality in order to afford college. If this is the case for you, the best advice you can be given is to never take more than you absolutely need. Yes, extra money right now would probably be awesome, but paying it back in the future...plus interest, won’t be so awesome. There are lots of different kinds of loans and words you probably have never heard before, so we will break down the most common loan types and go over some the lingo you will encounter within the “game of loans.”
Department of Education Loans
Your good ole’ friend the FAFSA (free application for federal student aid) must be filed in order for you to qualify for any kind of loan from the Department of Education (DOE), which you will see called “direct loans.” The majority of students are going to qualify for either direct subsidized or unsubsidized loans, or a combination of both. Direct student loans are typically going to have the lowest interest rates and most flexible repayments options. They will also have a fixed interest rate- meaning the interest rate will never change over the duration of the loan. Your direct loans can also qualify you for programs such as Public Service Loan Forgiveness, a program for students who work in a qualifying governmental agency or nonprofit to be eligible for the remainder of their direct student loan balance forgiven after 120 qualifying payments. The DOE also offers loans for parents of dependent students (typically under 24 and unmarried). These come through the Direct PLUS (parent loan for undergraduate students) program that we will cover later.
Direct Subsidized Loans
You may see a portion of loans your school offers in your financial aid package; these are direct subsidized loans. This loan type is offered to students based on their FAFSA application who have a higher financial need. Subsidized loans are the ideal type of loan because the government does you a huge favor and doesn’t charge you interest while you are still enrolled in college (at least half-time status) and for the six month grace period after you graduate. If you have the option to choose subsidized over unsubsidized, ALWAYS choose subsidized! It’s important to note that you typically will enter repayment for these loans six months after graduation or dropping below half-time status.
Direct Unsubsidized Loans
Most students, regardless of financial need, will be offered direct unsubsidized loans. These loans WILL begin accruing interest as soon as you receive your loan money (or your school does for tuition). You will also begin to repay these loans six months after graduation or dropping below half-time status. Since interest begins accruing right away, do your future self a favor, if you have the money to make interest-only payments while you are still in school, DO IT!
Direct PLUS Loans (Parent Loan for Undergraduate Students)
If you are a dependent student, your parents may also qualify for loans from the DOE to cover your college expenses. If after student loans there is still a gap in aid, your parents can apply for a PLUS loan to cover the remainder of your cost of attendance. For example, say the cost of attending your college is $10,000 per semester and your total aid package is $4,000 per semester. Your parents can take out a PLUS loan for the remaining $6,000 and have the funds paid directly to your college or university. If there is any money left over, a check will be sent to your parents and they may apply the funds to your school account. Your parent(s) must pass a successful credit check to be eligible for the funds. In the event, their application is denied, they can either request an endorser or you could receive additional direct unsubsidized loans. If you are a dependent, your family may qualify for a PLUS Loan. Repayment for this type of loan typically begins when the loan is paid out unless a deferment is requested. Since repayment begins immediately, it’s important that if your college has a payment plan to explore that route over PLUS loans because payment plans through your college are typically interest free.
If you’ve exhausted all of your other aid options, you may find yourself considering private loans through a bank, credit union, or loan company to cover the remaining cost of your education that your financial aid package does not account for. Be aware that these loans will typically carry a higher interest rate and do not offer as flexible of repayment options as DOE loans. These companies are also in the business of making money, so always keep that in mind as well. It is important to not be enticed by a variable interest rate. A variable interest rate means that it can change at any point throughout the duration of your line. So at first, it can be lower than the interest rate of direct student loans, but can increase at any point, so that’s a definite risk.
Repaying Your Loans
It is important that if you plan to take out loans, you thoroughly research the terms of the loans, repayment options, and craft a plan for how you will make the monthly payments when repayment time comes around, whether that’s a few months from now or a few years from now. It can be easy to adopt “I’ll worry about it later” mentality when it comes to students loans, but always be sure to keep track of the amount that you owe, so that an unpleasant surprise doesn’t await you. There are several types of repayment plans you will see, but here are a few of the most popular:
Payments are a fixed amount and you usually throughout your entire repayment period and you usually have up to 10 years to pay them off with this plan.
Payments are lower at first and then gradually increase over time (hopefully as your income increases). With this plan, you typically also have 10 years to pay them off.
Payment amounts are based on your income, family size, etc. Usually, your loan payment will be 10-15% of your discretionary income (income after taxes and necessities). This means each year your payment can change as your income or family situation changes. Any remaining debt will be forgiven after 20 or 25 years.
Your college education is an investment so be sure you are dedicated and finish your degree because the worst type of loans are those for a degree you never earned. We want to ensure you are aware of all of your financial aid options when it comes to applying to college, so check out all of our advice on financial aid.