Paying for college can be expensive. Many college students choose the option of student loans as a necessary evil to complete their education. With rising costs of college education, student loans are used by most students in the us.
The average annual cost of education at a private university is $35,000 today but you don’t have to go there and if you go there and obtain a degree that leads to high paying industry then you should be just fine.
Many students and families have no choice but to take student loans to pay for tuition expenses. However, it is vital to never sign up for more debt than you can handle.
Always read the fine print to assess the hidden costs. This guide will walk you through the various types of student loans and repayment plans. Let’s start with the basics.
What is a Student Loan?
Student loans are the money you borrow to pay for college related expenses. These include tuition fee, living expenses, books and maybe a laptop or PC. Like any other loan option, these loans will accrue interest that starts from the day you enroll into college.
The money is directly disbursed to the school to cover your tuition fee, room and board. The remainder is paid to you to cover the cost of your books and other things. Many private financial institutions disburse the loan amount directly to the borrower.
Typically, repayment of student loans does not begin before you leave school or graduate. Many financial institutions even give a grace period of 6 months. However, this does not mean that interest is not accruing during the grace period.
Unlike other loans, a student loan cannot be canceled or discharged. However, if you have not drawn the loan amount after applying, you might be able to cancel the loan without any risk.
Types of Student Loans
Student loans can be broadly categorized into 3 types: federal, state, and private. Here is a breakdown of these loans.
There are two Federal student loan programs available currently – The Federal Perkins Loan Program and William D. Ford Federal Direct Loan Program. You will need to fill out the
FAFSA (Free Application for Federal Aids Students) if you want to take up these loans. This application needs to be filled out every year to incorporate student status and income changes.
Direct PLUS Loans
These loans are available to parents of dependent undergraduate students and graduate students. The loan repayment begins 6 months after graduation. For parents, the loan comes up for repayment once the principal amount has been fully paid out.
Interest rates are fixed in this loan option and are higher than other direct loan options. Eligibility of this loan relies on good credit score. A student may qualify for additional unsubsidized loans if a PLUS loan is rejected.
Direct Subsidized Loans
These loans are for undergraduate students who require financial aid. The government pays interest during the time spent in school with an additional 6 months of grace period after graduation or drop out. They come with a fixed interest rate.
Direct Unsubsidized Loans
These are for both graduate and undergraduate students. There is no need to show proof of financial assistance in these loans. Interest rates are fixed and the borrower is responsible to pay the interest at all times. There is a 6 month grace period for repayment once the borrower graduates, leaves school or drops below half-time status.
Direct Consolidation Loans
This allows borrowers the opportunity to consolidate most Federal loans under one umbrella with one monthly payment. The interest rate is fixed and the loan gives 30 years to pay it back. This can lower monthly payment.
However, you need to be careful while choosing this permanent route. You could lose original loan benefits which might prove to be costlier in the long term.
Federal Perkins Loan
These are for graduate and undergraduate students. The loan is awarded based on the answers you fill out in the FAFSA. The deciding factor of these loans rests with the college financial aid office. College is the lender of Perkins Loans and repayments are made to the college.
These are offered in some states by state educational financing authorities. For instance, CHESLA in Connecticut and MEFA in Massachusetts allow state residents to borrow funds for both in-state and out-of state school options. These loans are generally with fixed interest rates that are lower than Federal loans.
These are offered by private lenders, financial institutions and banks. Interest rates can change as per the current market trends. Terms and conditions vary across different lenders. However, most of these loans need to be repaid while you are in college.
Extended Repayment Plan
This is available for all student loan types. This loan is designed to bring down your monthly payments by increasing the loan duration. You need to have a minimum of $30,000 in student debt to qualify for this repayment plan.
Graduated Repayment Plan
This is a kind of standard repayment plan and is considered one of the best. The premium amount gradually increases over a period of time.
This is the one of the best repayment options for college students because their income increases gradually once they find work and attain more experience. The highest premium payment is never more than 3x the lowest premium amount.
Income-Based Repayment Plan (IBR)
This is available to all loans except PLUS loans taken by parents. The plan lowers or increases your monthly premium as per your income. You can qualify for this plan when your standard repayment plan exceeds 15% of the difference between 150% of the poverty line and your Adjusted Gross Income (AGI).
Income-Contingent Repayment Plan
This is available to those borrowers who do not qualify for IBR or PAYE. This is created specifically for Direct Loan Programs. Monthly payments fluctuate on basis of your income and loan duration is for 25 years. A major benefit of this plan is that any loan amount that remains beyond 25 years is automatically forgiven.
Pay as Your Earn Repayment Plan (PAYE)
This is available to borrowers who took out a loan after October 1, 2007 and is similar to IBR except the payments must exceed 10% as compared to 15%. This is not available on Parent PLUS loans.
Revised Pay As You Earn Repayment Plan (RePAYE)
This loan is a continuation of PAYE except it is available to all borrowers regardless of the loan origination date. This repayment option is not available to Perkins loan and Parent Plus loans.
What You need to Do
Whatever loan you choose, make sure that it is well-suited to your needs. Before you undertake a student loan, you should carry out an active ROI analysis based on your future premiums and estimated income.
America needs tech, math, and engineering grads – these are the jobs that pay the most as well.