I'd like to discuss student loans. No, I'm not going to get on my soapbox once again and preach about the hazards of student loan debt. Financial aid packages will be forthcoming across the coming months and some have already been issued for the Early Decision (ED) and Early Action (EA) acceptees. So, it's important to understand everything associated with those loans. I'll get back to loan debt soon. You can be sure of that!
Families in the “full-pay" category for college are in the minority. As we've discussed before here, there are a number of ways to find out how much your family will have to pay for your college education. The FAFSA, CSS Profile and college-specific financial aid forms are all intended to assess a family's ability to pay for a specific college. There are also the Net Price Calculators that can give a pretty accurate ballpark of this amount without having to go through the formalities of the official aid forms.
Most students (and families), including some among the full-pay category, will have to deal with student loans. If you are a regular reader of my posts here, you know that I have beaten the drum about student loan debt quite loudly. Because of the sky-high (and ever-rising) cost of higher education these days, borrowing money, either by college students alone and/or through the co-signing of family members, has become the unfortunate norm. In many cases, students graduating from college, with undergraduate, graduate or professional degrees, face a lifetime of debt due to the fact that their loan balances exceed their ability to pay them off during a reasonable length of time.
“Necessary evil" would be a fair term to refer to student loans. They are a double-edged sword. On the one hand, they enable students to acquire college-degree credentials, for what that's worth in today's job market. On the other hand, the relative ease with which loans are available enables students to get fast cash to initiate or continue their higher education goals. Of course, there's no such thing as a free lunch, and students who have borrowed money for college must pay it back, or their families must pay it back if the student does not have the adequate resources to do so.
Some parents feel an obligation to “help" their children with this loan debt situation by making the payments even when their son or daughter has encountered relative success and independence in the job market. A friend of mine has continued paying his son's college loans decades after his son graduated. The son is now making three-to-four times as much as the father, but dad continues to pay the monthly tab despite his son's high income. I have counseled my friend that he should turn over the remaining debt to his son. That would help his son to enhance his credit score, but my friend refuses, in typical enabler fashion.
Facing the Unpleasant Reality
In working with college applicants over the decades, I've seen a number of situations where a student is accepted to his or her “dream" school only to be unable to attend due to the excessive amount of annual cash the families would be required to pay. Today, the student budget at top colleges is approaching $70,000 per year. Some schools, such as NYU's Tisch School, have already passed that milestone. Thus, the need for loans is an unpleasant reality.
To give you a few insights into student loan resources, I'd like to share some information from a website called ConsumerAffairs.com. They sent me an “expert" guide that explains some of the important aspects of student loans. I thought I would share some of that with you, since most of you who were admitted ED or EA last month will have received financial aid letters. Those letters should have outlined the financial aid packages, which will include the details of the debt you could be facing.
Accordingly, then, here is almost everything you need to know about student loans, but either were afraid to ask or didn't even know you should ask. Study up!
Money-saving benefits: It's important to choose a lender that offers great benefits, since these benefits can help you to save money over time.
– Cash back: Many lenders offer cash back on your loan when your payments are made on time.
– Interest: Loans with lower interest rates can save you a dramatic amount of money over time. Look for loans with interest rates of nine percent or lower.
– Amount: Find out about the amount of loan that you are able to receive. Only get as much as you really need, as many companies will offer larger amounts in order to gain money on interest.
Waiting period: Some loans will have longer waiting periods than others. Depending on how soon you need to get your loan, you should pay attention to the waiting periods of different lenders.
– Application process: The application process can either be very simple or very complex.
– Requirements: Buyers should check to see what the requirements of a loan are. Many loans require you to have a certain credit score and some take a look at how much debt you currently have and what you have paid off in the past.
– Fund transfer: Take a look at the process that the lender uses to transfer funds to you. Do you get all of the money at once or is it distributed over time?
Reseller of loans: Check to see if the lender you are looking into sells their loans to other lenders. Selling loans is very common practice but once your loans are sold you will be dealing with a new owner.
– Change of terms: Make sure that the terms of your loan will not change if your loans are sold to a new organization.
– Markets: To avoid confusion, choose a lender that only sells to one secondary market. It's always best to have all of your loans in one place.
– New owners: Do some research on the new owners that the lender often sells their loans to. You want to make sure they are reputable and easy to work with.
Servicers: Many lenders use student loan servicers. These companies take care of all the details of your loan.
– Reputation: Make sure that the servicer has a good reputation in dealing with students and loan situations in the past.
– Contact: If they do use a servicer, be sure to get in touch with them with any changes in your information, such as address or income.
– Payment method: Make sure that the servicer accepts your preferred payment method, whether it be check, credit card, or online payments.
Capitalization: Capitalization occurs when you have interest accrual on your account during the time you are in school. This happens with unsubsidized loans.
– Timeframe: Find out when a lender will add the interest that needs to be repaid. Most will add it at the beginning of the repayment period.
– Frequency: Lenders might choose to capitalize your repayments every few months or just one time, when you begin repaying your loan. It's best to go with a company that capitalizes just once as this will save you money over time.
– Payment amounts: Find out how much the monthly payment amounts will be, how they are calculated and how you can negotiate them.
Repayment options: When taking out a loan, it's important to understand the terms of the loan and what types of repayment assistance plans the lender offers. Choosing a lender that helps you manage your money well is very important.
– Graduated repayment: Graduated repayment plans help you start out with a lower payment plan and move up to paying more as your income increases over time.
– Consolidation: Consolidating your loans is helpful. It lets you lower the amount that you are paying by combining your loans into one monthly payment and increasing the length of time it takes you to pay the loan back.
Then the types of loans and for whom they're intended:
Federal loans: Federal loans almost always cost less and are easier to repay. Many federal student loans are subsidized, have fixed interest rates, and offer flexible repayment terms.
Private Loans: Private loans usually cost more than federal loans and don't have much flexibility in terms of repayment. However, you can borrow large amounts and if you have a good credit score you can usually find loans with low interest rates.
Subsidized Loans: With subsidized loans, the government pays the interest rates while you are in school. They are usually awarded to students based on their financial need and depend on the school and programs they are enrolled in.
Unsubsidized Loans: Unsubsidized loans are more common. They allow the interest on your loans to accrue and require you to pay it back after you have graduated from school.
Undergrads with financial need: Undergrads without an income or without the means to pay for college are eligible to apply for student loans to help deal with the burden of tuition costs.
Grad students with financial need: Graduate students without an income or without the means to pay for college are eligible to apply for student loans to help deal with the burden of tuition costs.
Students expecting an increase in income: Students who are enrolled in a field that will bring them a big increase in income are eligible for certain loans and can look forward to paying off their debt in less time.
Students who don't qualify for scholarships: Many students are able to get free money to apply toward college tuition. It's a good idea to explore this option before applying for loans, but if there aren't scholarships available then loans are the next best alternative.
So, there you have it -- some insight about student loans and their associated details. I hope this information may be of some help to you when it comes time to make your decisions about how to pay for college. They are big decisions with long-range effects.