What You Need To Know About Student Loans
Student loans are a very scary topic when you’re a brand new adult and you’re going to college right out of school. Let me tell you, I didn’t know a single thing when I accepted those loans and vowed to pay them back in 4 or more years. Then you forget about them and forget that they’re accumulating interest over those 4 years – which is a scary thought especially if you have to pull out some majorly big loans. So, this post is to break it down into layman's terms to help you understand what you’re getting yourself into and to make sure that you can get out of debt (or not get into it at all) as quickly as possible!
I’ve had to take out each of these types of loans so I have first hand experience with all of them. These are my tips and tricks that I’ve learned the hard way so you don’t have to!
Private Student Loans
Private student loans are not funded or subsidized by the federal government. Instead, they are funded by banks, credit unions, or other types of lenders. The bank or lender – not the federal government sets the interest rates, loan limits, terms, and conditions of the loan.
Most private student loans you’ll have to pay back while in college. Which could be really difficult depending on your schedule and the time that you’ve allotted to work while in college. I worked my butt off to pay off my private student loans while in college. Seriously, I worked 40-50 hours a week while taking a full credit load. (I don’t recommend that – BTW.)
Be very careful when it comes to private student loans because there’s not a cap on how much they can charge you in interest. The average private student loan interest rate is 9%-12% which is crazy!
Another thing to be aware of is with private student loans – you may be dinged if you want to pay it off sooner. So, I wanted to pay off my loans as soon as possible but was charged an additional fee for doing so. With your average government subsidized student loans – that likely wouldn’t be the case.
Direct Unsubsidized Loans
Unsubsidized student loans are a type of direct student loan to qualifying students. Unsubsidized means that the student borrower is responsible for the interest charged on the loan during the in-school and grace periods. Basically, interest accumulates on the loan the second you sign that piece of paper.
With this loan you do not have to demonstrate financial need when you apply for this type of loan which is great for students with parents who are doing well off but don’t want to give that student a free ride or cannot afford a full college tuition.
You can choose not to pay the interest while you are in school and during grace periods, which is usually 6 months after you aren’t a student full time. This usually means after you graduate – but if you decide that college isn’t for you. You’ll have 6 months of a grace period to find a job to start to pay back those loans. The interest will still accrue (accumulate) while you’re still in school or during your grace period.
Another downfall to this type of loan is that the interest will be added to the principal (or the total amount of your loan) meaning that your interest amount will slowly start to increase as you defer your interest payments.
With a government loan you will have a fairly low interest rate – in comparison to other student loan interest rates – which is on average, 4.29% – 4.66%. Which is likely the lowest rate for student loans that you’ll find.
Direct Subsidised Loans
Subsidised loans are a type of loan through the federal government where the government pays for the interest on the loan while the student is in college – not a bad deal right? So, you don’t have to worry about that interest until after your grace period of 6 months.
In order to qualify for a subsidised loan you need to provide documentation through fasfa.ed.gov that you have a financial need for this loan. Your parents previous year's tax documentation would do the trick. If your parents are separated or divorced, you only need to provide one parent's tax return information. Pro tip: use the parent who makes less money – you’ll have a greater likelihood to get more in financial aid help.
One catch with the direct subsidised loan is that your school determines the amount you can borrow, and the amount may not exceed your financial need. So, if you were looking at paying for housing off campus or food for the semester off of your loans – this loan may not do the trick depending on how your school sees “financial need”.
The average interest rate for subsidized loans are right around 6.8% – so, there’s a higher amount of interest that will accrue if you don’t pay off your loans right away. Just keep that in mind as you’re planning on paying off your debt.
Parent Plus Loans
Now, if you’re a parent – I do NOT recommend that you take out a parent plus loan for your child. I know you think that you child will never ever back out on payments, but it’s just not a wise financial decision. This loan means that your parent is basically co-signing a loan for you because you don’t have credit built up to take out any other loans.
To qualify for this loan your parent must not have a rough credit history and parent plus loans have a 4.272% fee. With the parent plus loans, your parent is trusting that you’ll pay the loans back. OR – if your parent is nice – they’ll pay for the loan themselves (but that’s usually not the case).
Here’s the thing: The maximum loan amount is the cost of attendance minus any other financial aid, but the school determines the cost of attendance. At the school that my husband and I attended, the school determined that you could also pull out housing, food, and money for materials like books. That meant that the cap for the loan was VERY high. As a freshman, you think you’ll need a ton of money to survive (you’ll learn how to live on the bare necessities as you go through school). So, in most cases with parent plus loans, the parent and student decide that they need the full amount that the government/school says they need. Which is NEVER the case.
What ends up happening is the student now took out $50,000 for the school year when they only needed $25,000 for tuition and the rest (like books, materials, rent, and food) can usually be paid for with a part time job.
If you couldn’t tell, I’m really not a big fan of Parent PLUS loans. I think it’s just a bad idea all around. Wanna guess how my sweet hubby racked up lots and lots of debt? Through Parent PLUS loans. That’s how.
Other Methods To Pay Off Student Debt
If you have wonderful family members, that love you a bunch and wouldn’t mind you borrowing money from them, that might be the better route.
There you go folks! That’s what you need to know about undergraduate student loans. I’ve added my two cents on what is the best option, but ultimately you know what works best for your situation. Just remember, no loans is a better method. You’ll thank yourself after you graduate instead of kicking yourself for years to come.
Please excuse me, I have some serious kicking to do...