By: AnnaMarie Mock, CFP®
If you are a parent with a child in college or paying off debt yourself, you probably are all too familiar with the astounding costs of a college education. With the average annual cost of a four-year private college at $49,320, it’s important to be realistic about how much of the tuition will be funded by student loans.
According to Student Loan Hero™, “Americans owe over $1.45 trillion in student loan debt, spread out among 44 million borrowers.” Student loan debt is nearly $620 billion more than the total U.S. credit card debt. Based on 2016 figures, the average loan balance per student is $37,172 which equates to a monthly payment of $351.
It is important to understand the benefits of education financed through student loans while preparing the correct course of action to repay the loans. The requirement to make student loan payments and creating a budget can be an opportunity for the student to develop financial responsibility and can be used as an educational tool for the parents. Learning to manage debt and income responsibly will be a necessary foundation for repaying debt and creating wealth. This article will give an overview of federal loans as well as information on how to begin organizing your loans in a concise way that will help present possibilities to repay the obligations.
Main Federal Loan Types
Federal student loans are designed to provide low-interest borrowing and flexible repayment options that come with perks available only to federal loans. It’s important to understand the type of loan obligations and be aware of the different courses of action that are available. Not all student loans are structured the same and will affect eligibility for certain borrower protections and debt relief programs such as income-driven repayment plans and Public Service Loan Forgiveness.
1) Federal Direct Loan Program: This program is the largest of the federal student loan programs. The funds for the loans come directly from the US Department of Education and has a fixed interest rate for the life of the loan.
a. Subsidized Loans: Students must show financial need, and the interest on these loans are paid by the government while in school. The loan amounts per year are capped at $5,500.
b. Unsubsidized Loans: There are no requirements to show financial need to obtain the loan. The interest accrues while in school and is added to the total liability amount. During periods of deferment or forbearance (topics will be covered in Part 2), the interest will, also, accumulate even if payments are postponed. The maximum annual award is $20,500.
c. Direct PLUS Loans: Parents of dependent undergraduate students, graduate students, or professional students can take these loans. Financial need does not need to be demonstrated. Please note, parents are responsible for interest on loan from the first month. The loan is a liability of the parent, and the balance cannot be transferred to student.
2) Federal Perkins Loans: As of September 20, 2017, the program expired and is awaiting further action from Congress. These are low interest federal student loans where the student expresses financial need. The school is the lender but not all schools participate in the program. Undergraduates qualify for $5,500, and graduates qualify for $8,000 in loans per year.
3) Federal Family Education Loan (FFEL) Program: Private lenders offered federal student loans to students which in turn were reinsured by the federal government. As a result of the Health Care and Education Reconciliation Act of 2010, no new FFEL Program loans were made from July 1, 2010.
Student Loan Inventory
Once you have a general knowledge of the types of loans offered, it is important to understand the terms of the loan obligations before evaluating the best option and creating a repayment game plan. One of the best ways to keep track of the loans is using a spreadsheet. Laid out below is a sample of the type of information to include. Each component will give you an arsenal of information to tackle the debt without negatively impacting your current finances. Depending on your current situation, you may be able to take advantage of opportunities only offered with certain federal loans.
If you are not aware of the specific information, there are a couple ways to access it:
1) Log into your loan servicer’s account
2) Obtain a copy of your credit report for a list of all outstanding debt
3) Review the promissory note signed at the commencement of the loans
4) Retrieve records at www.nslds.ed.gov - NSLDAS is the U.S. Department of Education’s central database for student aid.
With this information organized, you will be able to identify the benefits that are synonymous with your student loans and make the right decisions to start a healthy financial foundation. If there are questions you have pertaining to your loans, contact the loan servicer to clarify. In Part 2, I will cover how the information in your student loan inventory will help define and identify the different repayment plan options, consolidation, possible loan forgiveness or deferment/ forbearance, and how that may affect you presently and long term.
If you have any questions, please don't hesitate to reach out to the HIGHLAND team for more information.