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Student Loans: What You Need to Know

Updated June 2019: The Current State of Student Loan Debt in America…EVERY SECOND America’s student loan debt GROWS by close to $3,000!

The increase in tuition is directly related to the free flowing market of student loans. If I were in the lending business, I would love to have a loan on the books that is not able to bankrupted.

More often than not, students and parents are forced to take out student loans to help pay for their college costs. Loans come in two forms – federal and private (bank) – and no matter who you borrow the money from, you will need to repay it with interest so you need to understand the different types of loans and how they work.

Some good news for 2019, the federal interest rates are decreasing slightly for the first time in three years. Rates are set each year by the government effective July 1st for loans disbursed after that date. Private loan interest rates may also see decreases. Remember, these decreases are on loans disbursed after July 1st. Loans already paid are not affected.

Types of Federal Loans

Federal loans typically have lower interest rates and have more flexible repayment options (10 to 25 years); however, the amount you can borrow is limited.

The types of federal loans are Perkins (no longer available), Direct Subsidized Stafford and Direct Unsubsidized Stafford, Direct PLUS, and Direct Consolidation Loans. 

Here are some quick facts to help you understand each…

Direct Federal Stafford Loans:

The student loan nearly every family will consider is the Direct Federal Stafford loan—subsidized and unsubsidized.

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Both the subsidized and unsubsidized have loan limits based on the student’s grade and dependency. (Dependent students whose parents were denied a Parent PLUS loan can borrow at independent student limits.)

Here is summary of the annual loan limits available under the Federal Stafford loan:

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Direct PLUS Loan:

  • Available to graduate or professional students as well as to parents of dependent undergraduate students.
  • Parents must be approved with a good credit history.
  • Can borrow up to the total cost of attendance less financial aid.
  • Repayment for graduate student is deferred until they leave school. Interest accrues and is capitalized.
  • Repayment for parents may be deferred if requested.
  • Loan fee (deducted from disbursement amount):  4.272% from 10/1/15-16; 4.275% from 10/1/16-17; 4.264% from 10/1/17-18; 4.248% from 10/1/18-19; and 4.236% from 10/1/9-20.

Perkins Loan (program terminated 10/1/17):

  • Available to undergraduate and graduate students with exceptional need.
  • You must be attending a school that participates in the Perkins program.
  • You have nine months after leaving school to begin repayment.
  • The amount you borrow depends on your need, amount available from the school since the school is the lender, and the other aid you receive.
  • The interest rate is 5.0%.

Direct Consolidation Loans:

  • Allows you to combine all your eligible federal loans into a single loan.
  • Has a single loan servicer.
  • Gives you access to additional loan repayment plans and forgiveness.
  • No application fee.
  • Parental loans cannot be combined with student loans.
  • The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent.

More information about federal loans is available from the Federal Student Loan website.

What’s going on with interest rates?

As we said in the intro, loan rates for 2019 are decreasing for the first time in three years. This rate is based on the May auction of U.S. Treasury notes.

Be aware that even though rates are decreasing (and that is a good thing) the overall impact is small–about $300 for a $10,000 loan spread over 10 years.

Here is a new schedule of rates for Stafford and PLUS loans:

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What About Private Loans?

Private loans are made by banks and financial institutions and are the most rapidly growing section of education loans because the loan amount is unlimited.

Students and parents should only consider a private loan after they have maxed out all the federal loan money available to them. Interest rates, loan fees, and repayment terms can vary immensely.

Be careful to compare the payments they will face. Some banks will offer relatively low loan interest rates, but higher up-front fees. To compare, a 3 to 4% up-front fee equals a 1% higher interest rate.

Parents also need to be aware in most cases they will be required to co-sign on their student’s loan in order to obtain a competitive rate. Ultimately, these loans could become a parent’s responsibility if their student is unable to repay them.  If a parent is not comfortable with co-signing, we recommend parents and students have a conversation long before junior heads off to college.

Our Soap Box

After working with hundreds of families over the years, please allow us to get on our soap box. We recommend your clients estimate their total loan balance and resulting monthly payment for their student’s ENTIRE college career BEFORE deciding on a school.

Some Final Things to Consider

Will the monthly payment be an amount the parents or their student can afford? Here is a good monthly payment calculator you can use to compare loan options. As a rough estimate, for every $10,000 borrowed the payment will be $100 to $125 per month on the standard 10-year repayment schedule.

The total balance should never be more than the student anticipates making their first year out of college. Not sure what the student might be earning after they graduate? The Bureau of Labor Statistics has wage data on over 800 occupations to help you.

We talk so much about the student loan problem, but all the proposed solutions are reactive—after the fact—such as Income Based Repayment, Pay as You Earn, Public Service Loan Forgiveness, etc. We need to shift our way of thinking. We need a PROACTIVE plan to graduate on time with manageable student loan debt without robbing retirement!

Something else to consider…What if buying college was like buying a house? Check out our Changing the Approach to College Funding Advice for our ideas about proactive planning.

Updated: June 2019
Originally published: June 2017