High school seniors face many decisions before entering college, but perhaps the most important is how they will pay for their degree.
For many, this is a family affair: Parents—and even grandparents—are usually involved in discussions about student finance. Regardless of who is paying the bill, everyone involved should have a clear understanding of your payment options and responsibilities, says Rick Castellano, vice president of corporate communications at Sallie Mae. Schedule a time to sit down and discuss your options and expectations, the sooner the better.
“We consistently find that the families that sit down and come up with a plan are better equipped to pay for college,” says Castellano, noting that students and their families should discuss how much savings they have for college put tuition aside, how much debt they have they are willing to take on, and what the students’ career plans are after college.
“You should approach it with your eyes open and manage the expectations of how much debt you will have afterward.”
With that in mind, here are some tips if you are considering taking out a student loan.
1. First fill out the FAFSA form
Before you do anything, you should fill out the Free Application for Federal Student Aid (FAFSA) form, says Castellano.
Completing FAFSA isn’t always easy, but it is a “gateway to billions of dollars in financial aid” for borrowers in the form of scholarships, grants, work-study programs and federal loans, says Castellano. A lot of people don’t think they qualify for anything and don’t bother to fill it out, but that’s rarely the case.
A few things to keep in mind: You should understand the differences between the types of help that are offered to you. For example, there is an obvious difference between a grant that does not have to be repaid and a loan that does. But there are also subsidized and non-subsidized loans. Subsidized loans are based on need, and the US Department of Education pays the interest while you’re in school. With unsubsidized loans, you are responsible for all interest from the time you borrow it.
You also don’t have to accept all the help that is offered to you. Bring only what you need to keep your debt in check, advises Castellano. On the other hand, if you are not satisfied with the assistance offered, you can object to your financial assistance package.
Another important note: FAFSA opens on October 1st each year and aid is provided on an ongoing basis. It is still open for the 2022-2023 school year, and you can also plan ahead to complete it early for next year. Here is a list of everything you need to apply.
2. Consider non-loan options
Scholarships aren’t just for the best of their year and soccer stars. There are millions of grants across the country for all types of recipients, but finding them can take some detective work. Use search engines like Sallie Mae’s that aggregate millions of grants in one place. You can also contact the tax office at your university to find out what scholarships are available.
States also have assistance programs that can assist eligible residents (the Cal Grant and the New York State Tuition Assistance Program are two examples). In some cases, completing the FAFSA is sufficient to apply for this aid; In other cases, states have their own applications. Deadlines for this help vary by state, but it’s often first-come, first-served, so apply early.
Castellano says post-FAFSA, scholarships and family savings (if available) should be part of the conversation. Once those pieces of the puzzle are put together, you can start looking at credit, he says.
Loans should complement scholarships, personal savings and other means of funding the school whenever possible, he says. “On rare occasions, they should be the only way to pay for college.”
3. Opt for federal loans over private loans
Student loans can come from the federal government or a private lender. “Typically, students want to borrow federal loans first before considering a private lender,” says Liz Frazier, certified financial planner and chief financial literacy officer at Copper Banking. “Federal loan rates tend to be lower, and they have more flexible repayment options.”
You also don’t need a credit history to qualify for federal loans, while private loans do, which may mean you need a co-signer on your loans. There are also caps on how much you can borrow in federal loans each year.
On the repayment front, borrowers with federal loans may qualify for forgiveness programs such as the PSLF (Public Service Loan Forgiveness) program. There are also income-based repayment programs, where your monthly payment is determined by your income and family size.
While some private lenders offer flexible payment plans or help borrowers who are struggling to pay their bills each month, there are no guarantees. Borrowers with federal loans can also defer their loans when they need to, during which time they do not have to make any payments.
Families should also understand that Parent PLUS loans taken out by the student’s parents or grandparents do not have as many forgiveness and refinancing options as other types of federal loans, and that the maximum loan amount is the cost of participation minus other funding are support given to the child, which can get borrowers into trouble if they borrow too much money and end up having to pay off a large loan.
“Most families believe that the cost of college is a shared responsibility,” says Castellano. But “You see parents getting over their heads … they borrow too much.”
If you’ve exhausted your federal loan options and still need more financing, you can look into private loans—just don’t borrow more than you absolutely have to. Be sure to shop around for the best interest rate.
“Borrow as little as you need, not as much as you can. Don’t treat credit limits as targets,” says Mark Kantrowitz, President of PrivateStudentLoans.guru.
4. Understand interest and monthly payments
When calculating how much debt you can afford, you should consider interest, says Castellano. Federal loans have a fixed interest rate that changes each year. Last year it was 3.73% for direct student loans, but like other interest rates, it will rise this year.
“When you’re paying off your student loans, understand that your payments start with interest and fees first before you start with the principal,” he says. Interest accrues daily and you pay an originator fee on your loan. Currently, all interest and monthly payments on federal loans are suspended until August 31, 2022.
You can play around with some online calculators to get a feel for what your monthly payment might be when you graduate. Note that the current average monthly payment is around $400, according to the Federal Reserve. It’s important for families to understand how these expenses fit into a student’s postgraduate budget.
If possible, it is good for students and their families to make regular payments during school hours. Even a little money thrown on your loan early can help you save on interest for years to come.
5. Don’t rely on forgiveness
Although President Joe Biden is reportedly considering a large-scale student loan waiver, Castellano is urging families not to include it in their student loan calculations. Not only is it not guaranteed to happen, but you still need to be smart about the debt you take on. For those with personal debt, this is probably not the case at all.
“The big picture is what we’re going to do on the front end to make sure we’re not in the same situation 10 years from now,” says Castellano. “If the federal government is still lending billions of dollars a year and college tuition is increasing every year … we haven’t done anything to fix the broader system.”
Of course there are a few caveats. If you plan to go into public service (such as teaching in a public school or working for the government), you should familiarize yourself with PSLF. Borrowers who meet the strict program requirements will have their loans forgiven after 10 years of on-time payments. And borrowers with an income-contingent repayment schedule can have their balance forgiven after 20 to 25 years. But that’s still more than two decades of payments to make.
Paying for college in the US can be complicated and expensive. But if you sit down and work through your financing options and create a long-term plan, you can take on debt with clear eyes.
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