Student Loans and You: Part One – Understanding Student Loans
It’s common knowledge that for many, student loan payments have become a growing concern. The rising cost of a college education, coupled with a tighter job market has led to national student load debt approach $1.5 trillion. In Pennsylvania alone, 71% of 2015 graduates left school with an average debt of $34,798.
At the same time, surveys have shown that young people are often unaware of how much they owe and why. A recent Citizen’s Bank survey revealed the following:
- 45% of survey respondents didn’t know what percentage of their salary went to paying off their loans
- 37% were unaware of the interest rate on their loan
- 15% were even unaware of how much they owe
- 44% claimed not to fully understand the difference between federal and private loans
Even in a state like Pennsylvania and a city like Philadelphia that offer affordable state and private colleges, dealing with student loan debt has adversely affected the ability of many Millennials to buy a home, start a family and invest in their future.
While these statistics paint a negative picture, with a little help there are ways to improve the situation.
Understanding Student Loans
The first step toward solving the problem of student loan debt it to understand them. That’s why we are creating a two-part article on this topic. The first will provide information on understanding student loans, and the second on how to reduce interest and even pay them off faster.
The first thing to understand about student loans is that very few students graduate with a single loan. Instead, most students borrow money through their college’s financial aid office. The office puts together a package of loans based on the student’s need. Often the student and their parents are unaware of how much they’ve borrowed and to whom their money is owed.
Before you do anything, you should contact the student loan office at your alma mater. Even if you’ve graduated, they can still often provide you with the information you need to understand your loan package.
When you get that report, you should see that your student loans fall into two major categories – federal and private.
First, let’s look at federal loans.
What is a Federal Student Loan?
Federal Loans are quite simply, loans paid for by the U.S. government, and there are four different loan types offered:
- Direct Subsidized Loan
- Direct Unsubsidized Loan
- Direct PLUS Loan
- Federal Perkins Loan
These loans usually carry interest rates between 3–7%, are provided based on need, and there is usually a limit to how much one can borrow.
There are some key advantages to federal student loans as opposed to private loans.
- The interest rate is fixed and is often lower than private loans
- You will not have to start repaying your federal student loans until you graduate, leave school or change your enrollment status to less than half-time
- Undergraduate students with financial need will likely qualify for a subsidized loan – where the government pays the interest while you are in school on at least a half-time basis
- Loans can be consolidated
- If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments
- There are several repayment plans, including an option to tie your monthly payment to your income
- You may be eligible to have some portion of your loans forgiven if you work in public service
Information on these loans is accessible online through the Office of Federal Student Aid (FAFSA). When you access the site, you’ll be able to set up an FSA ID, which will allow you to access your student loan information across multiple platforms including My Federal Student Aid or the National Student Loan Data System(NSLDS).
Try to learn as much about each loan as possible including the amount owed, payoff period and interest. You’ll need this information later.
What are Private Student Loans?
Private loans are provided by a private lender such as a bank or a credit union. While federal student loans offer many benefits, they aren’t always enough to cover the cost of college. This is where private loans come into play.
Unlike most federal student loans, which are limited in size, private student loans may be used to cover the total cost of attendance. In addition, processing and disbursement tend to be much shorter for private student loans. This is especially helpful for those who need their money in a short period of time.
However, there are also drawbacks to private loans:
- Private loans can be subject to a variable rate, so the rate can increase or decrease over the life of the loan rather than remaining constant
- Repayment plans for private loans are less flexible than those offered through the federal Direct Loan program
- Deferment may not be available if you’re having difficulty making your payments.
The good news is that private student loans can be refinanced if you have good credit.
If you’re unable to acquire the information about your private student loans from your student loan office, you may be able to find the information reflected on your credit report. You can access this information for free once each year using annualcreditreport.com.
Once you have this information, make sure to track your loan payments in the same way that you would for your credit card or any monthly bill. Keep in mind that loans can often be transferred between loan service providers, so make sure you’re up to date on who’s managing your loan.
In part two, we’ll talk about how you can organize the information and how you can find ways to refinance, consolidate and reduce your loan payments.
Looking for more ideas on how to pay down your student loan debt? Come talk with us today! We can help you with loans, financing, and other ideas on how to save for the future. If you are in the market for student loans, we also offer loans with a high degree of flexibility. Learn more here!