Student Loans: What Students and Families Need to Know Before Heading to Campus

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Hi Enchumbao readers,

This week we have an awesome guest post by Jacob, the creator of @DollarDiligence! A millennial blogger, freelancer, and teacher working to save you more money each month. Jacob proudly paid off $25k in student loan debt in 15 months.

We’ve all heard the stories about how someone’s grandfather worked a minimum wage job on the weekends and managed to pay out-of-pocket for his schooling, then just got a good job right after he graduated.

Times aren’t like that anymore.

Student loan debt is increasing because government support and grants for college haven’t kept up with the increase in college costs. In 1993, around half of the people graduating with a bachelor’s degree graduated with an average of $10,000 debt. In 2016, more than two-thirds of college students graduate with at least three times that debt.

student loans

These statistics affect everybody from kids going to college, to their parents, to anybody who wants to better their job prospects. It can be scary to think about taking out a bunch of loans to pay for education, but you can make smart loan decisions when you understand how student loans work. A good place to start is by understanding the differences between federal student loans and loans from private institutions.

Federal Student Loans

Federal student loans are funded by the federal government, so they have more relaxed rules on repayment and generally lower interest rates vs. private student loans. If you need to borrow money for college or a career school, you always want to go to federal loans first. There are four types of federal student loans: Direct Stafford loans both unsubsidized and subsidized, direct plus loans, and federal Perkins loans.

  • Direct subsidized loans are available to only undergraduate students with financial need, and your school determines what you can borrow based on that need. These loans are called subsidized because the U.S. Department of Education pays the interest while students are in school at least part time, for the first six months after a student graduates, and during deferment periods.
  • Unsubsidized loans are a little different primarily because they are available to graduates and undergraduates, and there is no need to demonstrate financial need. The student’s financial institution decides on the amount the student can borrow based on the cost of attendance and other financial aid. Unlike subsidized loans, the student is responsible for paying the interest on an unsubsidized loan during all periods.
  • Direct PLUS loans are eligible to students whose schools participate in the Direct Loan Program. With Direct PLUS loans, the U.S. Department of education is your lender. To qualify for this loan, the borrower cannot have an adverse credit history and the maximum loan amount is the cost of attendance minus any other financial aid received.
  • Federal Perkins Loans are low-interest federal student loans for undergraduate and graduate students with financial need. The interest rate for the Federal Perkins Loan is 5%. While the financial institution will be the lender for the Federal Perkins Loan, not every school participates in the program.

Private Student Loans

Private Student Loans are much more like traditional loans. They are non-federal loans made by a lender such as a bank (ex. Most often Sallie Mae), a credit union, or a community bank. As such, they’re not subject to the same regulations as federal loans, so you need to look at other factors to choose a loan that won’t give you headaches after you get your degree. Here’s some of those factors.

  • Credit – Private student loans will require an established credit record, so the cost of a private student loan will depend on your credit score and other factors. Many students need a cosigner when it comes to a private loan, so parents should be aware that their credit score matters too.
  • Interest – Because they’re not artificially kept down by the government, interest rates for private loans are usually much higher. Be aware also that some education loans from private institutions often have a lower introductory rate that stays low while the student is actually in school, and then get higher once they’re not.
  • Fees – Many private loans also come with fees for various things including late payments. These fees are incurred in addition to the interest on the loan, so they can make a loan with a low interest rate end up costing the same as one with a high interest rate. Always look out for the fees, and show any loan terms to a financial advisor if you need help deciphering them.

Always Shop Around

To compare the interest rates, APR, and other factors on private student loans, just use a loan calculator. It can be a good idea to look at these anyway so that you can really see how much interest you’ll have to pay on top of the principal of the loan. When you see the effect of all these factors right there in numbers and dollar signs, it brings home how important your choice of student loans can be.

How are you saving money on your student loans? For the college graduates, how did you save money on tuition? Do you have student loans?

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Mr. Enchumbao

Mr. Enchumbao retired at 44. He worked for 13 years at Vanguard, primarily as a Communications Project Leader in the Institutional Division, helping people save for retirement.

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