Welcome to the world of Student Loans. In this comprehensive guide we will cover –
Types Of Student Loans
Student loans can be broken down into two major types – Federal & Private.
Federal loans take the lion’s share of the student loan business – with approximately 1.64 Trillion in outstanding student loan debt. The reason for the Federal loans are used so much more than private loans comes down to one thing – cost. The interest rates are usually higher than Federal student loans and they are not easy to obtain – with most of them requiring excellent credit or a co-signer for the loan.
The terms of the private loans are generally not as favorable of the Federal counterpart as well. So, since we know that Federal student loans can be a better choice (usually), let’s get into those choices first!
- Direct Subsidized Loans / Stafford Loans
- Direct Unsubsidized Loans / Stafford Loans
- Parent PLUS Loans
- Graduate PLUS Loans
- Direct Subsidized Loans
Direct Subsidized Loans are available based on financial need to undergraduate students. The school that a student is attending determines what amount the student can borrow – the amount may not exceed the financial need. These loans are all about financial need. The best feature of Direct Subsidized Loans is that the US Department Of Education pays the interest on the loan while the student is in school at least half time. This means that while you are studying at college, the interest is not working against you and is being subsidized by the US Department Of Education. Upon graduation from school, the grace period begins and lasts for 6 months. During this time, the interest is still being paid by the US Department Of Education.
The Direct Subsidized Loan is really the best Student Loan that one can get. Unlike private loans, there is no need for credit history or a co-signer. The repayment terms are flexible and come with several loan forgiveness and forbearance options. More on those later. This should be the starting point of all borrowing that is related to attending a college or university. There are limits to the maximum amount an undergraduate student can borrow – which is currently $23,000. Start with these loans on your borrowing journey. Hopefully, you will be able to qualify and take advantage of them. The current rate for loans being taken out through June 2020 is 4.53% for undergraduates and 6.08% for graduate students.
- Direct Unsubsidized Loans
Direct Unsubsidized Loans are another option for borrowing to fund higher education. First, try for the Direct Subsidized Loans! Hopefully, you can qualify for them based on financial need. Direct Unsubsidized Loans work differently – and there is no requirement to demonstrate financial need. These loans are available to both undergraduate and graduate students. Just like Direct Subsidized Loans, the borrower’s school determines the amount that a student can borrow based on the coast of attending the school along with any other financial aid that a student may be receiving. The major difference between this and the Direct Subsidized Loans, is that the student is responsible for paying interest on these loans at all times. The interest is not subsidized by the US Department Of Education. A student can choose not to pay the interest while attending school and during grace, deferment and forbearance periods, but the interest still accrues during this time. This means that the interest is still added to the total principal of the loan during these times. If possible, it is wise to make payments at all times of the loan, in order to have a lower total cost in the long run.
These Direct Unsubsidized Loans are usually chosen and are usually the best choice for students that do not qualify for the Direct Subsidized Loans – as they do not demonstrate the financial need that is required in order to qualify. Loan limits are higher for these loans than the subsidized loans.
Direct Loans (both subsidized and unsubsidized) are also known as Stafford Loans or Federal Stafford Loans.
Loan Limits Direct Subsidized Loans – Direct Unsubsidized Loans
Here is some handy data:
First Year Undergraduate Limits (annual):
Dependent Students: $5,500 total – maximum of $3,500 of this amount can be from subsidized loans.
Independent Students: $9,500 total – maximum of $3,500 of this amount can be from subsidized loans.
2nd Year Undergraduate Limits (annual):
Dependent Students: $6,500 total – maximum of $4,500 of this amount can be from subsidized loans.
Independent Students: $10,500 total – maximum of $4,500 of this amount can be from subsidized loans
3rd Year And Beyond Undergraduate Limits (annual):
Dependent Students: $7,500 total – maximum of $5,500 of this amount can be from subsidized loans.
Independent Students: $12,500 total – maximum of $5,500 of this amount can be from subsidized loans.
Grad & Professional Student Limits (annual):
All Students: $20,500 – must be unsubsidized – all grad and professional students are considered independent students.
Subsidized & Unsubsidized Total Aggregate Loan Limits:
Dependent Students: $31,000 total – maximum of $23,000 of this amount can be from subsidized loans.
Independent Students: $57,500 total – maximum of $23,000 of this amount can be from subsidized loans.
Graduate & Professional Students: $138,500 total – maximum of $65,500 of this amount can be from subsidized loans. — This limit includes all federal loans received for undergrad study as well.
If during an educational path, the total loans received reaches the maximum limit, there are no other federal funds available for continued borrowing. At this point, some loans could be paid down in order to borrow more; or looking at the Private Loans for additional funds.
Also note that the total aggregate loan limits may be higher for certain students in certain health profession programs. The best resource to determine any additional eligibility is to speak with someone in the financial aid office at the attending school.
Origination Fee / Loan Fee For All Direct Loans – 1.062% of the total loan amount. This amount is proportionally deducted from each disbursement that is processed throughout the life of the loan.
- Parent PLUS Loans
Parent PLUS Loans are also known as Direct PLUS Loans. These loans are made to a parent to fund a child’s college, university or career school. They have several distinct advantages + disadvantages and can pay for certain expenses that are not covered by other financial aid products and programs.
There are requirements that must be met in order to receive a parent PLUS loan. The parent must be either the biological or adoptive parent of a dependent undergrad student that is enrolled an an eligible school at least half-time. In some cases, stepparents are eligible. There are credit history requirements that include not having $2085 or more in debt that is at least 90 days delinquent or in collections / written off. For the previous five years, there cannot be an defaults, bankruptcy discharges, wage garnishments. Tax liens, repossessions, foreclosures or federal student aid debt written off.
If these credit requirements and eligibility requirements are satisfied, a parent can then apply for a Direct PLUS loan.
In a Direct PLUS Loan, the US Department Of Education is the lender. The maximum amount that can be received is the cost of attendance at the eligible school. The school determines this amount. Subtracted from this amount, is the amount of any other financial aid that is being received.
Currently, for Direct PLUS loans that are disbursed before July 1, 2020, the fixed interest rate is 7.08%. It is fixed rate and lasts for the entire duration of the loan. As you can see, the interest rate is higher than that of the Direct Subsidized Loans and Direct Unsubsidized Loans. These Direct Plus Loans are issued to the parent and do require immediate repayments once the loan is disbursed, unless a deferment is requested. A deferment will allow for no payments to be made while the child is attending school at least half-time and for 6 months after graduation, dropping below half time enrollment, or leaves school. Even when deferment is granted, interest will accrue on the loan. During a deferment, interest payments can still be made – and if not, the interest is added onto the principal of the loan.
It is important to know that Direct PLUS loans do have an origination fee – which is currently around 4.25%. This is a larger origination fee than that of Direct Loans @ 1.062%. Again, it is a good time to mention to first explore the Direct Subsidized Loans, then Direct Unsubsidized Loans, then move on to Direct PLUS Loans.
- Graduate PLUS Loans
Graduate or Grad PLUS loans are designed to help pay for grad school. The Graduate PLUS loan allows the borrower to borrow up to the cost of attendance minus any other financial ad that is received. This would be a good option if the Direct Loans – both subsidized and unsubsidized have been maxed out or are otherwise unattainable.
Graduate PLUS Loans differ from the Direct loans (but are similar to Parent PLUS loans) in the fact that credit is required in order to obtain them. Just like Parent PLUS Loans, there cannot be an adverse credit history. If credit is an issue, Grad PLUS loans do allow for a cosigner. When a cosigner is not available, and funds are needed to further education, this is the point where many students do turn to the private student loan market. More on that below. A good idea is to keep your credit OK while in college! Debt can be hard to manage, but a history of on time payments, decent credit utilization and an awareness of your credit score can be all that is needed to get a Grad PLUS Loan when the time comes. They aren’t looking for a 750 FICO score; they are looking to see responsibility including defaults, bankruptcy discharges, wage garnishments. Tax liens, repossessions, foreclosures or federal student aid debt written off. If these things are OK, the chances are good for approval of a Grad PLUS Loan.
Grad PLUS Loans do not require payments when enrolled in a grad program at least half-time, but interest will accrue during this time period; just like a Parent PLUS Loan. If payments are not made during this time, the interest continues to accrue and is tacked on to the principal of the loan. This can be costly in the long run – any payment is a good payment during this time.
Currently rates for Grad PLUS Loans are 7.08%. They are fixed for the life of the loan and can change each year – based on what Congress sets for the rate. The rate is Fixed; even though a student must prove creditworthiness. A borrower with excellent credit gets 7.08% just like an approved borrower with just fair credit – they both get 7.08%. There could be savings to be had in the Private Loan market – if the student has a strong credit profile.
Much like the preceding products, Grad PLUS Loans do have an origination fee; and at this time it is 4.236%. This is on the higher end of origination / loan fees – and may be another contributing factor to shop the private loan market to see if a lower overall loan cost can be found.
- Private Loans
Typically, private loans show only be used once Federal Stafford Loans and any other tuition options have been exhausted. At this point, all other avenues for aid should be exhausted; including filing a FAFSA form to see of there are any other work-study programs, grants or any other forms of student aid are available. This is because Private Loans are usually the most expensive form of student aid and may have the most unfavorable repayment terms. However, it should be noted that in some cases – when a student has a strong credit profile, there may be interest rate savings versus Grad PLUS loans (7.08%). When comparing Private Loans to Grad PLUS loans, be sure to factor in any fees when making a true cost comparison.
Private Student Loans vary in interest rates and fees, depending on the lender and credit profile. Some of the best private loans on the market will be just underneath the Prime rate; such as Prime – 0.25% or PRIME – 0.50%. The best Private loans will not have any origination fees or other fees attached to them. Some lenders use the LIBOR (London Interbank Offering Rate) as the interest rate benchmark instead of PRIME. In this case, the best rates are usually LIBOR + 1.5 – 2.0 %. These best rates will not be available to all borrowers; only the ones with the best credit profile or when a cosigner with an excellent credit profile is attached to the loan.
Federal Student Loans
The starting point for all federal student loans is completion of the FAFSA (Free Application for Federal Student Aid) form. It can be completed at FAFSA.gov . This application is required to be submitted in order to determine eligibility for a federal student loan. FAFSA applications are free to submit – there are no cost associated with the submission. The FAFSA needs to be completed yearly; in each year that a student needs tuition money to pay for college or university. They are not accepted before October 1st each year; so the idea is to submit it as close to October 1st as possible (but not before). Timeliness can help with your submission, since some grants are allocated and awarded on a first come first served basis. Once your application is processed, you will receive a financial aid offer outlining the amount of federal student loans that you are eligible to receive.
Private Student Loans
Private student loans are made directly between a bank / lending institution and the student. Therefore, applications are made directly with the bank. This process would be like comparison shopping for anything else in life. It is time to check out many different lender’s websites in order to shop for the best deal. When comparing different loans, pay attention to the repayment option flexibility, other fees and of course – the interest rate. The application will be submitted directly to the lender; much like applying for any other type of credit. The lender will ask you about the interest rate type and the desired repayment option. Cosigners can be added to the application process too. The lender will check the credit of the borrower and cosigner (if applicable) in order to make a decision on the application. The lender will notify you of their credit decision.
Repayment Of Student Loans
Perhaps a student has graduated or has taken some time off from school. When do student loans need to be repaid? That is going to depend on the type of loan. Let’s take a look.
Generally speaking, most (not all), student loans have a 6 month grace period. During this time, there are no payments required after graduation or dropping below half-time matriculation. This period of time allows for a student to find a job and start to earn money.
These loans have 6 month grace periods: Direct Loans (Both Subsidized & Unsubsidized), Federal Stafford Loans (Both Subsidized & Unsubsidized). SOME (not all) Private Student Loans – you have to check with your individual lender or the contract that was signed.
As previously mentioned, PLUS Loans do not have any grace period. Repayments begin immediately when the loan is disbursed. .
Repayment Of Federal Student Loans
There are several repayment plans available for repayment of Federal Student Loans. The Standard Repayment Plan is designed to ensure that a borrower has their student loans paid off within 10 years. All borrowers are able to participate in the Standard Repayment Plan.
Graduated Repayment Plan
Payments start off low at the beginning of the repayment period and then increase later. They typically adjust every couple of years for an amount that will ensure that the loan is paid off within 10 years. This is a valuable option for those that expect to earn more money in the future than in the present. All borrowers can participate in this plan; but know that it will cost more over time than the Standard Repayment Plan.
Extended Repayment Plan
This plan extends the duration of the payback period – to ensure the loan is paid off within 25 years. In order to be eligible for this plan, a Direct Loan borrower must have at least $30K in outstanding Direct Loans. The main benefit here is lower monthly payment amounts; at the expense of a higher overall cost than under the Standard Repayment Plan.
Revised Pay As You Earn Repayment Plan (REPAYE)
This plan allow borrowers to have monthly payments of 10% of discretionary income. Each year, payments are recalculated based on income. Any outstanding balances are forgiven if the loan has not been paid in full after 20 years (undergraduate study) or 25 years (graduate and professional study). This program has been gaining in popularity. Income tax may be payable on any amount that is forgiven. This is a great option for those borrowers seeking PSLF (Public Service Loan Forgiveness).
Pay As You Earn Repayment Plan (PAYE)
This is very similar to REPAYE, however, eligible participants must be new borrowers; on or after 10/01/2007 and must have received a disbursement of a Direct Loan on or after 10/01/2011. The participant must have a high debt relative to their income. Income tax may be payable on any amount that is forgiven. This is a great option for those borrowers seeking PSLF (Public Service Loan Forgiveness).
Income-Based Repayment Plan (IBR)
Monthly payments are equal to either 10 or 15 percent of discretionary income. Payments are recalculated each year. An outstanding balance will be forgiven if the loan is not repaid in full after 20 or 25 years, depending on when the first loans were received. Income tax may be payable on any amount that is forgiven.
Income-Contingent Repayment Plan (ICR)
Monthly payments are the smaller amount of 20 percent of discretionary income or the amount that would be paid on a repayment plan with a fixed payment of 12 years; adjusted for the participant’s income. Outstanding balances will be forgiven if the loan is not paid in full after 25 years. Income tax may be payable on any amount that is forgiven.
Income-Sensitive Repayment Plan
Monthly payment is based on annual income, but the loan will be paid in full by the 15 year mark.
Private Student Loan Repayment
These terms will vary from private lender to private lender. If the terms seem unfavorable, it may be time to consider refinancing.
Refinancing & Consolidation
There are several options to refinance and consolidate student loan debt. This is an attractive option for borrowers that have multiple student loans with varying terms and interest rates. It can be much easier to streamline the repayment process into one payment each month; and hopefully at a lower interest rate.
Refinancing Federal & Private Student Loans
It is important to now that there is no refinancing of loans through the Federal Government. They can only be refinanced through a private lender. When a Federal Student Loan is refinanced, a private lender pays off the federal loan(s) and the borrower is issued a new private loan – with a new interest rate and repayment terms. The decision to refinance is final and cannot be reversed. There are certain risks and benefits when refinancing from a Federal Loan to a Private Loan. Potential Loan Forgiveness will be sacrificed in additional to flexibility with repayment plans, payment waivers and payment deferments. If a borrower has several Federal Loans, it could make sense to refinance some of the higher interest debt while keeping some of the loans as Federal Loans; in order to have the features and benefits that come with them. Every situation is different; so we suggest doing plenty of research before making any decisions.
Student Loan Consolidation – Federal (Direct Loan Consolidation)
Direct Loan Consolidation is the act of combining multiple Direct Loans into a single loan; with a fixed interest rate. The interest rate is usually the median interest rate of all loans that are being consolidated.
There is no application fee for a Direct Consolidation Loan. Keep in mind, this is through the federal government. There are private companies that may charge an application fee; but not for a Federal Direct Consolidation Loan.
Consolidation is not for everyone; and has its advantages and disadvantages. It is a great way to have a single loan with one monthly bill; instead of multiple monthly bills. Lower monthly payments and the opportunity to switch from a variable interest rate to a fixed interest rate are all positive.
There are negatives, too. Consolidation usually increases the repayment period of the loan(s) (hence lower monthly payments); but at the expense of having a higher overall cost over the life of the loan. Outstanding interest also converts to Principal during a consolidation; which translates to more interest being charged on a larger principal balance. Consolidation can negatively affect progress made towards PSLF! Be aware of this when researching the various consolidation options. Do your research before making this hugely important decision!