Student loan debt is substantial. Total U.S. student debt is more than total credit card debt and has exceeded $1 trillion. This is a new record.According to a report by the Institute for College Access & Success, almost 70% of grads receiving bachelors degrees in 2015 averaged more than $30,000 debt each.
Student loans come from the government, schools and private lenders. Though lenders try to provide complete information and provide disclosure statements, students are still surprised when they graduate. In the midst of excitement about college, alluring sales pitches and encouragement from parents and advisors, the cold hard facts too often don’t hit home until the diploma is followed by the final bill and payment schedule.
For example, a the New York Times told the story of a recent graduate now paying off debt of $120,000. That's a crazy situation and one with serious implications for students and for the country’s economy.Where does that leave you the student? Hopefully with eyes wide open about what you are taking on and a desire to be informed:
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Choosing Student Loans
Update January 2018: Thinking about getting a private student loan? It may be necessary if you’ve gotten all you can from government loans and you’re still short on funds. There are lots of options for private loans — but they’re not all equal. A recent article in the Wall Street Journal strongly recommends that you be sure to shop around when considering lenders. Too many people ignore this step and may end up paying more than they need to. The interest rate you’re charged will depend largely on your credit score but there will still be differences among lenders. To get the actual details on loans, apply for several and see how both the interest rate and the payment plans stack up. Know the total amount you’ll pay over the life of the loan, not just what you’ll pay monthly. Also see if you can reduce your interest rate by agreeing to automatic payments.
Update August 2017 Whoa, if you’re looking for a student loan you would be smart to go after it sooner rather than later. There’s no predicting what will happen in the future, but there are voices being heard suggesting that student borrowers should be treated a bit more like other borrowers in such areas as the interest rate they are charged … So if a student’s prospects for a well-paying job on graduation based on their major look a little dim, they might be charged a higher interest rate because it’s a riskier loan. Of course they’ll run into trouble if it looks like Women’s Studies is not being treated equally with Engineering or Computer Science … especially if one is major is predominantly women and the other mostly male. Others say we should just insist that colleges cosign student’s loans … that way they’re on the hook to better prepare the student for a way to be able to repay his or her debts. It will be interesting for sure. In the meantime, go get that loan you’ve been thinking about …
The figures above should also leave you with a desire to take a hard look at all loan options. In addition to government loans there are other sources of funds such as grants for college, scholarships and private loans. Each has its own pluses and minuses. Similar consideration should be given to choosing a major. College should be a time to pursue many interests. At the same time your choice of a major can have a significant impact on the income you’ll be able to achieve. Income is not by any means the only reason to go to college but it will be very meaningful when it comes to paying off your loans. Let’s take a look at just what your college money sources are:
Government Student Loans
There are different kinds of loans and each has its own particulars regarding amounts, repayment periods, interest rates, when repayment starts, and so on. It can be mind boggling but the government has done a good job at making information available.
Student loans from the government are called federal student loans and they fall into two major categories: the William D. Ford Federal Direct Loans are the largest program. They may be subsidized or unsubsidized depending on the level of the student’s financial need. They tend to carry lower interest rates than most private loans. There are also loans that are offered to graduate or students in certain professions to help cover costs over and above those covered by financial aid. They also offer some Direct Consolidation Loans that allow you to put all your loans together in one, serviced by one organization. All these loans are made through a program that is managed by the federal government.
The second category of federal student loans is the Perkins Program. These loans are actually made by the school and they are for students with extreme financial need. Further information needs to come from the particular school’s office that handles financial aid. The maximum amount of the Perkins Loan is $5500 each year. The other loans (under the Ford Direct Loans Program) can be anywhere from $550 to $12,500. All these figures apply only to undergraduate loans.
Parents of dependent undergraduates may also take out loans to cover the expenses not covered by financial aid. A credit report is required in this case. And of course the parent is responsible for repaying the loan. In most cases you do not have to start repaying the loan until the student graduates.
Compare government student loans to help you figure out what might work best for you and your family.
Scholarships for High School Seniors for great tips on how to find financial awards that never need to be paid back.
Applying for a Federal Student Loan
The way to apply for all federal financial student aid is to fill out the FAFSA, or the Free Application for Federal Student Aid. Over the years this application has become friendlier and easier to fill out, complete with direct connections to your tax information so you don’t have to find and enter it all yourself. The results of the FAFSA will determine your eligibility for and receipt of not only federal loans but also many loans and grants from educational institutions, non-profits, private companies and more. It is a supremely imporant first step and it’s important to understand it well. Check out our review and tips in this summary of the FAFSA.
The FAFSA is also important in that it can qualify you to receive a Pell Grant. This is even better than a loan because it is a gift of funds for college or career school and never needs to be paid back. Don’t ignore the FAFSA if you think you will not qualify — billions have been left on the table by people who felt the same way — mistakenly. Take a look at our Quick Pell Grant Quiz to see if you might even be eligible for that grant.
Private Student Loans
There are many options for private student loans, as you will see if/when you search the topic on the web. Many have very reasonable rates and payment policies. Your family may have a good relationship with a bank or credit union which would make a favorable offer on a loan. Sallie Mae is the best known since it used to be a government entity. It is now private, publicly traded, and a servicer of private student loans. Its minimum credit score is 640; the typical borrower has a score of close to 750. When considering a private loan be sure to compare not only interest rates but also repayment options and options for deferment in certain circumstances.
Tips for Borrowers
Update April 2019 There’s a surprisingly bright note on the topic of student loans. Though mot publicity is all about doom and disaster a recent Wall Street Journal report about a five year research project on such loans has some good news. The results of the study showed that student loans actually help students get higher grades, take more classes and therefore graduate sooner. The loans also provide a buffer that allows students to handle unexpected situations. They can also spend more time studying and less time working to earn necessary money. Students who got loans even got better grades and on average and and were projected to earn more money than those who did not. So don’t be afraid to take out student loans, just do so wisely and follow the advice in this article.
Be sure you don't get caught up in accepting every loan offer that is made to you. Loans can add up faster than you think and it’s critical that you know exactly what obligation(s) you are taking on — and what kind of payments you can afford.
When deciding on your major take a look at typical salaries in your chosen field, and consider the cost of living where you plan to live. That will give you some idea of how much you can afford to put aside each month to pay off your loans.
Always stay in touch with your loan servicer, especially if you are having difficulty making your payments.
Take the time to check out scholarships. This is truly free money and there are probably far more you could win than you realize!
Be sure you pay attention to the repayment requirements. Make your payments on time to avoid penalties and additional interest charges.
Finally, if you're already worried about the amount of debt you are accumulating, discover more about grants to pay off student debt.