College costs are increasing at over twice the rate of inflation. At the same time, rising unemployment and falling stock prices could make it difficult for the average family to save enough for college. It’s no wonder that more and more students are turning to student loans to help finance their educations. Recent student loan legislation brought the biggest reforms to student loans in quite some time. Over the next few weeks, we’ll give you a primer to securing the right undergraduate and graduate student loans, consolidating loans after graduation and paying off the loans in a way that makes sense for your circumstances. Let’s dig in!
Types of Student Loans
Federal Loans: When a student applies for financial aid through a college, part of the package is likely to consist of Federal Direct loans. These direct loans can be either subsidized or unsubsidized, where subsidized means that interest does not accrue while the student is in school at least half time. There are limits to how much a person can borrow each year of school (currently $27,000 total for a dependent student borrowing for 4 years of school), and further limits as to what portion can be subsidized federal student loans. Because of the recent reforms, loans are made directly from the government and interest rates and other characteristics of federal loans are fixed.
PLUS loans: PLUS loans are federal loans that can be offered to parents as part of a student’s financial aid package. They can also be offered to graduate students. They have higher interest rates than Federal Direct loans. Payment begins 60 days after full disbursement, but can be deferred while students are enrolled half-time. Note that interest does accrue during any deferral. Student loan interest will be reported on form 1098.
Private student loans: While the government is no longer guaranteeing student loans made by third-party institutions, many banks and other private lenders such as Wells Fargo and Sallie Mae do still offer some type of “student” loan. The difference from student loans of old is that these primarily work like any other personal loan – interest rates can be adjustable and your credit history will greatly impact the amount and terms that you receive. If you have to take out private loans, look at several financial institutions for the best terms.
Other options: Some states and individual schools also have their own loan programs. Check with your own state and/or school for details.
How Much is Too Much?
As mentioned before, your school will limit your loan amount based on your financial aid eligibility, up to the maximums allowed by the federal government. But there are no maximums on private loans, and some students may not even need to take the full amount approved by the school. Parents who have explored college funding options should not need to take the maximum allowed for PLUS loans.
I once heard that your total amount of student loans (undergraduate and graduate) should be no more than 1 year of your expected salary when you finish school. If you are planning to be a doctor or lawyer, you might need to take out those amounts. But my total student loans amounted to about 1/3 of my salary out of college – and I can’t imagine having a payment three times what it is! So in my opinion, loans equivalent to one year’s salary may be too much debt, especially with the unstable job market!
In general, you should strive to take out as little as possible, especially if you need private loans to further subsidize your education. Tuition, fees and books are a given as those are necessities for making it to graduation. Be judicious when taking out money for living expenses – a place to sleep and basic groceries are living expenses. A beer fund and designer clothing are luxuries.
If you are plan to help your kids pay for college some day, you can give them the gift of minimal or no debt by saving as much as possible now. But for the vast majority of students who do need some sort of outside assistance, it pays to be judicious when taking on debt. Stay tuned for thoughts on consolidating and paying off that debt!
Do you have student loans? Do you wish you had taken out less money, or different kinds of loans? Please share your thoughts or questions below – you may see them answered in a later post!
Check out all of the posts in our Student Loan series!