Understanding Student Loans
We’ve been talking a lot lately about student loans–what are they, how does one come by them, what happens when we can’t pay them back? They are the subject of much discussion because they’re occurring at unprecedented rates, incurred by students who then struggle to find jobs after completing school.
Many students are told that college offers the only route to success in the workplace–but more and more, this is called into question. As college tuition costs continue to rise and job opportunities become a scarcity, college may not be the right route for everyone.
Before thinking about going to college, returning to college, or skipping college all together, it is important to have a solid understanding of the types of financial aid available to you–specifically, it is helpful to understand the student loan.
Financial aid is not so simply divided up between grants and loans. Instead, loans fall into a number of different categories.
Subsidized Stafford Loans
This type of loan is available to US citizens and eligible non citizens enrolled at least half time in an eligible degree or certification program. The total amount of money to be borrowed cannot exceed $23,000 and is limited by year enrolled in a program. Beginning in 2012, this type of loan became ineligible to graduate students. Subsidized Stafford Loans are to be repaid beginning six months after graduation, withdrawal, or half time enrollment.
These loans offer a variety of repayment plans, though it is expected that the loan be paid off within ten years. While you are in school, this type of loan accrues interest. Interest is also accrued during your grace period, though payments are optional. Interest is 6.8%.
Unsubsidized Stafford Loans
This type of loan is for both US citizens and eligible non citizens and requires at least half time enrollment in a program. This type of loan is not based on financial need, and the type of loan (subsidized vs unsubsidized) is based on calculations done by the Department of Education. Amounts adhere to a base amount, though additional unsubsidized funding is available if aid doesn’t exceed the cost of attendance. Subsidized and unsubsidized Stafford loans cannot exceed $31,000.
Graduate students are eligible for unsubsidized Stafford loans in the amount of $20,500 per year. Total loans (including undergraduate) cannot exceed $138,500–though students in health professions may qualify for more.
Like subsidized loans, repayment begins within six months of graduation, etc. The interest rate is also the same, though interest begins accruing as soon as the money is distributed.
Perkins loans are meant for students that need the money–one must demonstrate exceptional financial need to qualify. Like the other types of loans, they’re available to US citizens and eligible non citizens who are enrolled at least half time in an eligible program. You can borrow up to $5,500 a year if you’re an undergraduate (maxing out at $27,500) and $8,000 if you’re a graduate students (maximum of $60,000).
Perkins loan repayment begins nine months after graduation/withdrawal/a fall below half time enrollment, and the borrower has up to ten years to complete repayment. They offer more limited repayment schedules and have a services that is different from most federal loans. They’ve also got a fixed rate interest of 5%.
Parent PLUS Loan
Parent PLUS loans are given to natural and adoptive parents (though stepparents do qualify sometimes) of eligible dependant undergraduate students who meet the usual requirements. They’ve got to have good credit, may require a cosigner, and are not based on financial need.
These parents are eligible to borrow up to the total cost of attendance at the school where the student is attending, minus all other aid received. There is no annual or total borrow limit.
Parents have ten years to complete repayment and have repayment plans available. They’ve got an interest rate of 7.9% currently.
Grad PLUS Loans
Similar to the Parent Plus loan, the Grad PLUS loan is available to graduate and professional students with good credit. The loan is nearly identical to the Parent PLUS version and has an interest rate of 6.4%.
These loans are for those who have taken out loans from one or more federal student lenders. There are no loan limits, but the consolidation loan makes it so repayment is extended for up to 30 years. You may end up paying more for the loan over the course of its life, but it can be a good payment option for many. The loans are fixed interest and interest is calculated by taking the weighted average of the loans being consolidated–then rounding up by an eighth of a percent.
Institutional and Private Loans
Institutional and private loans are non federal forms of student aid. Institutional loans are provided directed by the school and are serviced by an agency selected by your educational institution. Private loans have nothing to do with the federal government and can be taken out by either students or parents. Because they vary so much, it is important to get into contact with your lending institution for more details. Private loans likely have higher interest rates, so use them sparingly and as a last resort.
State loans are provided through programs funded by the state and don’t have anything to do with federal loan programs. Depending upon the state, interest rates vary. While they aren’t as low interest as federal loans, they’re slightly better than private loans.
The Bottom Line
Student loans can be a confusing and frustrating form of college payment–certainly worth giving careful thought to before enrolling. The cost of attending college and the inconvenience and high cost of student loans (while better than other types of loans) is such that many have decided to put off additional schooling in favor of work and wealth.
What do you think? If you’ve chosen to pursue a college education, how did you go about paying for it? If not, has the cost of tuition prevented you from pursuing a degree? Let us know!
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The Young Wealth Team