The following is a guest post from The Student Loan Report, a blog that focuses on helping the 43 million student loan borrowers stay up-to-date with the latest news regarding something that (unfortunately) affects their lives so much. It is written by Drew Cloud, a journalist who typically writes about student loans, personal finance, and education.
Teaching Kids about Their Student Loan Options
College is a fun and exciting time, especially if you are about to enter as a Freshman. As a parent, you can remember the uncertainty that young students feel as they leave home for the first time. After all, there is plenty that needs to be squared away before making that move. While school supplies and textbooks are important, figuring out the logistics of financing each semester is even more important. Unless you happen to have saved thousands in a college fund, you will most likely resort to student loans to fund your teenager’s college excursion (or education).
While applying for and obtaining student loans is relatively easy, the second half of the bargain is what gives everyone trouble, especially young college students. Student loan debt has become a serious issue that is currently plaguing millennials. There are currently about 1.3 trillion pieces of evidence that suggests this. This should worry you as a parent because you know about the troubles that debt can cause. If your kid is going to need financial aid, then there is a whole lot you can do to prepare them for the responsibility. Of all the things you can do such as co-signing or helping pay interest, one of the best ways to prepare your teenager is by educating them.
Student loan debt is serious, and the default rate is evidence that graduates and students are having trouble with their loans. One significant root to this problem is the lack of education on basic student loan principles. Many go to college without actually understanding the financial responsibilities that tag along. This is a serious problem that helps catalyze the overall student loan issue. Before your child takes out any student loans, you need to spend some time learning the ropes before it is too late. Here are some of the basics to student loans.
Federal Student Loans vs. Private Student Loans
Federal student loans are offered by the U.S. Department of Education and they are available to all students, no matter your credit situation or your past payment history. There are two main types of federal student loans, which include subsidized and unsubsidized.
The main difference between a subsidized and unsubsidized loan is their eligibility criteria. Subsidized loans are awarded to individuals who display a clear financial need while unsubsidized loans are awarded on looser criteria (therefore they are more common). Subsidized loans are much more popular for obvious reasons; for instance, the government pays off the interest while the loans are in deferment during school (hence why these are awarded to financial needy applicants).
The amount of money you receive from federal student loans does have a cap on it, but in most situations, the amount is enough to afford your semesters at college. For example, undergraduate students can receive totals of $5,500 to $12,500 in both subsidized and unsubsidized loans. Graduate students can receive up to $20,500 per year in unsubsidized loans. The loan amount is heavily dependent on financial background and need which is all relayed in the FAFSA.
Private student loans are offered to you by privately-owned banking and lending companies, hence the term private student loans. Unlike federal student loans, no private student loans are subsidized, so there is no help for a financial needy applicant. Loan amounts are usually determined with a classic underwriting criteria which means decisions are heavily influenced by credit history. Due to this factor, private student loans are much harder to qualify for as a young adult such as your teenager. This means that you, the parent, would have to cosign on a private loan and assume partial responsibility for the loan payments. If you are weary about picking up more debt, then a private student loan may not be the ideal choice, but there are other perks to these loans.
Since this part of the industry is privatized, there is competition between lenders in the marketplace. This leads to competitively low interest rates which can only benefit borrowers. Additionally, borrowers can choose between variable or fixed interest rates as opposed to fixed federal interest rates. On top of this, there is much more flexibility in terms of different payment plans than federal student loans.
Your Options with Federal and Private Student Loans
There are plenty of options available for student loans both during and after college. It is extremely important for your college student to understand these options if they are to effectively handle their loans.
Refinancing is available for both federal and private student loans, but student loan refinancing is a service that is only offered by private companies. It is important to understand that the U.S. Department of Education does not refinance any student loans. When you refinance your student loans, you are essentially transferring your debt to a private institution. Multiple loans with multiple interest rates are “refinanced” together into a new, single loan with one new interest rate. In most cases, this situation leads to hundreds if not thousands saved on interest over the life of a loan. In addition to a new interest rate, a new repayment plan is drawn up. It is a complete restructure of your current loan situation that often leads to savings.
Refinancing student loans is a great option for saving money, but it is difficult for someone with bad or nonexistent credit history to qualify. One option you may need to consider as a parent is co-signing on a refinancing deal in order to help your teenager out. This is generally encouraged by the private refinancing lenders, but it is not mandatory.
Loan Forgiveness Programs
Student loan forgiveness programs do exist, but they are only available for federal student loans. Loan forgiveness programs are not available for all career choices either, but the federal government offers loan forgiveness programs for anyone with a public service, nursing, or teaching career. Federal student loan forgiveness is also provided for someone who experiences death or disability, but you really don’t want that as an option for your kid. You should make sure your teen is up-to-date on these programs, especially if they are planning on pursuing any of the career options mentioned earlier. These programs are characterized by a low approval rate, but recent legislative actions have pushed towards looser restrictions in terms of forgiveness eligibility.
Income-Driven Repayment Plans
Income-driven repayment plans are ONLY available for federal student loans. An income-based repayment program takes a portion of your discretionary income, usually 10%, and puts it towards your student loans each month. These programs are gaining in popularity because they are especially useful to someone who has trouble making monthly payments. The fractional amount of income taken away is also very helpful to someone who is just starting out in the real world. There is one more extremely beneficial aspect of this program. After ten years of monthly payments, the remaining loan balance is forgiven. This is a great option to relay to your teen.
What are your thoughts? Do you have personal experience with student loans? Have you brought up this topics to your teenage kids yet? If not, do you plan to do so?