June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Most parents start worrying about how they're going to pay for Junior's college education before he's done with kindergarten—and with good reason. According to The College Board, a non-profit association of over 6,000 schools, colleges and universities, the average annual cost of attending an in-state public college is about $20,090. Private schools average over twice that—about $45,370.
Scary as that may seem, millions of students manage to attend the college or university of their choice, thanks in large part to the availability of need-based government-guaranteed student loan programs.
Government Offers a Variety of Loans to Meet Different Needs
Government-guaranteed loans are based upon financial need. To determine your need, fill out a Free Application For Federal Student Aid (FAFSA). The worksheet will take into account your estimated college expenses and any financial aid and scholarships you will receive. The Student Aid Report you receive back will tell you how much your family is expected to contribute toward college expenses. The difference between that and the cost of attending college is the amount you may be able to borrow through one of these loan programs:
- Subsidized Stafford Loan. The interest rate for a subsidized Stafford loan for the 2016-2017 academic year is 3.76%. "Subsidized" means the federal government pays the interest while the student attends school and payments can be deferred until graduation.
- Unsubsidized Stafford Loan. The interest rate for an unsubsidized Stafford loan for the 2016-2017 academic year is 3.76%. With an unsubsidized loan, the student is responsible for the interest that accrues while he or she is in school, but payments can be deferred until after graduation.
- Perkins Loan Program. Available for students with limited incomes, undergraduates may borrow $5,500 per year, up to a total of $27,500. Graduate students may borrow $8,000 per year up to a total of $60,000 (undergraduate and graduate borrowing combined). The loans bear a fixed 5% interest rate. Availability is limited based upon the school's share of Perkins Loan funding. Schools typically set eligibility requirements and loan amounts, and loans are often granted on a first come, first served basis. Like the Subsidized Stafford Loan, the government pays the interest while the student attends school.
- Parent Loan for Undergraduate Students (PLUS). Loans for up to the full cost of attendance are made to parents, not students, to cover costs not otherwise covered by the student's financial aid package. PLUS loans disbursed after July 1, 2016 have a fixed interest rate of 6.31%. Repayment generally occurs over a period of up to ten years beginning 60 days after the full loan disbursement. Eligibility for these loans can be affected by the parents' credit history.
Note: Before July 1, 2010, Stafford and PLUS loans were also made by private lenders under the Federal Family Education Loan (FFEL) Program. As a result of recent legislation, no further loans will be made under the FFEL Program. All new Stafford and PLUS loans will come directly from the U.S. Department of Education under the Direct Loan Program.
Of course, you always have the option to get a non-government guaranteed student loan from any institution that lends money. But, because the loans are not guaranteed, you can expect the rates and fees to be higher than those charged on the loans listed above.
Loans Come with Repayment Options
Most student loans are repaid in equal monthly installments over a 10-year term, but there are other repayment options. One is a graduated payment schedule that requires lower payments in the early years and higher payments toward the end of the repayment period.
Another option available for some federal loan borrowers is an "income sensitive" repayment plan tied to the borrower's earnings. The monthly payments, however, usually must at least cover the interest accruing on the loan.
You may also qualify to extend the loan repayment from 10 years to 25 or 30 years. In addition, there are options for consolidating various student loans into a single loan.
It may be possible to qualify for a repayment deferral if you are unemployed, suffer economic hardship or return to school. There are other limited circumstances under which deferral, forbearance or cancellation might be possible.
A good online source of information about all kinds of financial aid is FinAid.org. Visit Sallie Mae for the bottom line on everything related to student loans. CollegeBoard.com offers tools and tips to figure out what college really costs and what you can afford.
With so much information and assistance available to parents and students, your dream of packing Junior off to college really can come true.