Many parents lecture — er, talk to — their teenagers about being responsible. Don’t text and drive. Do try to spend that summer job money wisely. As children approach college, talking about student loans might be a smart idea.
For one, the topic is pretty complicated. And second, even if you plan to help repay any student loans, most qualified education loans are taken out in the student’s name, and there’s usually no escape: Even bankruptcy rarely erases student loan debt.
Maybe your student-athlete or scholar is counting on a full ride. While confidence is a wonderful thing, full rides are exceedingly rare.
Here are six student loan concepts you can discuss with your aspiring college student.
Related: College planning guide for parents
1. Here’s What We Think We Can Contribute
It might be uncomfortable to talk frankly about your family finances, but they almost always determine the amount and types of financial aid your child may qualify for. It can be important for parents to discuss what they’re able to contribute in order to help their young adults wrap their heads around the numbers, too.
2. Let’s Forge Ahead With the FAFSA
The first step to hunt for financial aid is to complete the FAFSA, the Free Application for Federal Student Aid. It takes most people less than an hour. Students helping their parents fill it out will get a look at the expected family contribution: the family’s taxed and untaxed income, assets and benefits.
Based on financial need, a college’s cost of attendance and FAFSA information, schools put together a financial aid package that may be composed of scholarships and grants, federal student loans, and/or work-study.
Awards based on merit (scholarships) or need (grants) are free money. When they don’t cover the full cost of college, that’s where student loans can come in.
If your income is high, should you bother with the FAFSA? Sure, because there’s no income cutoff for federal student aid. And even if your student is not eligible for federal aid, most colleges and states use FAFSA information to award nonfederal aid.
About 400 colleges and scholarship programs use the CSS Profile, a financial aid application in addition to the FAFSA. It determines eligibility for institutional scholarships and grants.
3. Interest Rates: Fixed and Not
Your soon-to-be college student may not know that there are two types of interest rates: fixed and variable.
Fixed interest rates stay the same for the life of the loan. Variable rates go up or down based on market fluctuations.
You can explain that all federal student loans borrowed after July 2006 have fixed interest rates, which are set each year, and that private student loan interest rates may be variable or fixed.
4. Federal vs Private Student Loans
Around now, your young person is restless. But press on.
Anyone taking out student loans should learn that there are two main types: federal and private. All federal student loans are funded by the federal government. Private student loans are funded by some banks, credit unions and online lenders.
If your child is going to borrow money for college, it’s generally advised to start with federal student loans. Since federal student loans are issued by the government, they have benefits, including low fixed interest rates, forbearance and deferment eligibility, and income-based repayment options.
Private student loans have terms and conditions set by private lenders and don’t offer the generous repayment options or loan forgiveness programs that federal loans do, but some private lenders do offer specific deferment options. Private student loans can be used to fill gaps in need, up to the cost of attendance, which includes tuition, books and supplies, room and board, transportation, and personal expenses. A student applicant often will need a cosigner.
5. Another Wrinkle: Subsidized vs Unsubsidized
Financial need will determine whether your undergraduate is eligible for federal Direct Subsidized Loans. Your child’s school determines the amount you can borrow, which can’t exceed your need.
The government pays the interest on Direct Subsidized Loans while your child is in college, during the grace period (the first six months after graduation or when dropping below half-time enrollment), and in deferment (postponing repayment).
With federal Direct Unsubsidized Loans, interest begins accruing when the funds are disbursed and continues during grace periods, and the borrower is responsible for paying it. Direct Unsubsidized Loans are available to both undergraduate and graduate students, and there is no requirement of financial need.
Borrowers are not required to pay the interest while in school, during grace periods or during deferment (although they can choose to), but any accrued interest will be added to the principal balance when repayment begins.
There are annual and aggregate limits for subsidized and unsubsidized loans. Most dependent freshmen, for example, can borrow no more than $5,500.
6. Soothing Words: Scholarships and Grants
It’s important to not overlook the non-loan elements of the financial aid package. They can (hooray) reduce the amount your student needs to borrow.
Scholarships and grants are essentially free money. While some schools automatically consider your student for scholarships based on merit or other qualifications, many scholarships and grants require applications. You may want to assign a research project to your college-bound young adult to look into all of the scholarship options they may qualify for.
The Takeaway
Debt isn’t the most thrilling parent-child topic, but college students who will need to borrow should know the ins and outs of student loans: interest rates, federal vs. private, subsidized versus unsubsidized and repayment options.
Learn More:
This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here undergraduate student loans rates. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Private vs. federal student loans
Getting accepted to college may seem exciting on the surface, but in reality, it’s only half the battle. After you’ve filled out your applications and decided on a school, you’ll then need to fund your college education (which can quickly dampen the excitement of getting accepted).
There are a few different options when it comes to financing a college education, and it’s important to understand the pros and cons of each. Then, you’ll likely be better able to develop a funding strategy that fits your unique situation.
Depending on your academic qualifications, you may have been awarded scholarships or grants, which is funding that won’t (typically) need to be repaid. Any expenses not covered by a scholarship will need to be financed, often through a combination of work-study, personal funds, or student loans.
It is fairly common for college students to take out student loans to finance their education. There are two main types of student loans: private student loans and federal ones.
We’ll compare and contrast some of the more popular features of both private and federal student loans and explore some features that can help you determine what makes the most sense for your financial situation.
Related: A guide to private student loans
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Federal student loans are funded by the federal government and, in order to qualify, you must fill out the Free Application for Federal Student Aid (FAFSA) every year that you want to receive federal student loans. We’ll delve more into FAFSA soon — but first, here are some important distinct
ions to consider.
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Federal loans can be subsidized or unsubsidized. If you’re an undergraduate student and you have a certain level of financial need, you may qualify for a subsidized loan. The amount of money you qualify for will be determined by your school. They’ll also determine how much money you should receive in subsidized loans, if any.
If you are granted a subsidized loan, the U.S. government will cover, or subsidize, the cost of accrued interest on the loan while you are a full- or half-time student.
Your interest payments are also covered with subsidized loans during the six-month grace period after graduation as well as during any periods of loan deferment.
If you receive unsubsidized federal loans, you will not need to demonstrate financial need when applying and, as with subsidized loans, your school will determine the amount you can receive, based on what it will cost you to attend.
But with unsubsidized loans, you are responsible for the principal amount of the loan as well as any interest that accrues throughout the life of the loan.
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Direct PLUS Loans are another source of federal student loan funding. To qualify for graduate PLUS Loans, you need to be a graduate-level or professional student in a program that offers graduate or professional degrees or certifications and be attending college at least half-time.
Or parents can also apply for a parent PLUS loan if they’re the parent of a dependent undergraduate student attending an eligible school at least half-time. “Parent” can be defined as biological or adoptive — or, under certain circumstances, you can be a step-parent.
To obtain a Direct PLUS loan, you cannot have an adverse credit history (you can learn more about that here). Plus, you (and, if applicable, your dependent child) must meet the general eligibility requirements for federal student aid.
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If you plan to apply for any of these types of federal loans, you’ll need to fill out the FAFSA form. Be aware of your state’s deadline — FAFSA funding is determined on a rolling basis, so the sooner you can apply, the sooner you may qualify.
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First off, you won’t be responsible for making student loan payments while you are actively enrolled in school. Your repayment will typically begin after you graduate, leave school, or are enrolled less than half-time. Interest rates on federal student loans made after July 1, 2006 are fixed and are typically lower than interest rates on private student loans.
And depending on the type of federal loans you have, the interest you pay could be tax deductible. Aside from Direct PLUS Loans,credit history doesn’t factor into a federal loan application. When it comes to federal student loan repayment, there are several options to choose from, including several income-driven repayment plans.
And if you run into difficulty repaying your federal student loans after graduation or when you drop below half-time enrollment, there are deferment and forbearance options available.
These programs allow qualifying borrowers to temporarily pause payments on their loans should they run into financial issues, but interest may still accrue. The loan type will inform whether a borrower qualifies for deferment or forbearance.
Borrowers can contact their student loan servicer for more information on these programs.
Qualifying borrowers can also enroll in certain forgiveness programs, such as Public Service Loan Forgiveness (PSLF). These programs have strict requirements, so borrowers who are pursuing forgiveness should review program details closely.
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The CARES Act, passed in March 2020 in response to COVID-19, includes provisions to help borrowers with federal student loan repayment. The bill temporarily pauses payments on most federal student loans, without interest, through the end of September 2021.
Additionally, the CARES Act suspends involuntary collections and negative credit reporting during the same time period.
While required payments are paused, borrowers are still able to make payments on their loans if they so choose. 100% of payments made during this time will be applied to the principal balance of the loan.
Borrowers enrolled in forgiveness programs will not be impacted by the nonpayment of their loans during this time. The Education Department will consider this time period as if the borrower had continued making payments.
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Private student loans are not funded by the government. To apply for them, you can check with individual lenders (banks, credit unions, and the like), with the college or university you’ll be attending, or state loan agencies.
Because these loans are available from multiple sources, and each will come with its own terms and conditions. So, when applying for private student loans, it’s important to clearly understand annual percentage rates (APRs) and repayment terms before signing as well as the differences between private vs federal student loans.
Since private student loans are not associated with the federal government, their repayment terms and benefits vary from lender to lender. Some private loans require payments while you’re still attending college.
Unlike federal loans, interest rates could be fixed or variable. If you are applying for a variable-rate loan, it’s a good idea to check to see how often the interest rate can change, plus how much it can change each time, and what the maximum interest rate can be.
When applying for a private loan, the lender typically reviews your financial history and credit score, which means it may be beneficial to have a cosigner.
Again, be sure to ask your lender about repayment options in addition to any deferment or forbearance options.
These will all vary by lender, so it’s important to understand the terms of the particular loan you are applying for.
Private loans can help fill the monetary gap between what you’re able to cover with grants, scholarships, federal loans and the like, and what you owe to attend college. It’s never a bad idea to take the time to do your research, shop around, and find the best loan options for your personal financial situation.
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To find out if the student loan you have is a federal student loan, one option is to check the National Student Loan Data System (NSLDS).
This database, run by the Department of Education, is a collection of information on student loans, aggregating data from information about student loans, aggregating data from universities, federal loan programs and more.
Borrowers with federal student loans can also log into My Federal Student Aid to find information about their student loan including the federal loan servicer.
Private student loans are administered by private companies. To confirm information on a private student loan, one option is to look at your loan statements and contact your loan servicer.
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After graduation, depending on one’s student loan situation, borrowers may wish to consider consolidation or refinancing options to combine their various loans into a single loan.
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The federal government offers the Direct Consolidation Loan program that allows borrowers to combine all of their federal loans into one consolidated loan.
Loans consolidated in this program receive a new interest rate that is the weighted average of the interest rates of all loans being consolidated — rounded up to the nearest one-eighth of a percent.
This means that the actual interest rate isn’t necessarily reduced when consolidated. If monthly payments are reduced, it is most likely because the repayment term has been lengthened.
Additionally, only federal student loans are eligible for consolidation in the Direct Consolidation Loan program.
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Borrowers with private student loans might consider refinancing their loans. Essentially, refinancing is taking out a new loan. Depending upon individual financial situations, applicants could qualify for a lower interest rate through refinancing.
When an individual applies to refinance with a private lender, there is typically a credit check of some kind. Each lender reviews specific borrower criteria, which varies from lender to lender, which influences the rate and terms an applicant may qualify for.
But what if you have both federal and private loans? If you combine your federal loans through the Direct Consolidation Loan program and refinanced your private loans, you’d still have two payments.
Learn more:
This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here undergraduate student loans rates. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Featured Image Credit: fizkes / istockphoto.
