How Students and Families Can Manage College Costs
College can be one of the most significant investments in many people’s lives. The student debt crisis is currently at an all-time high, with Americans owning nearly $1.6 trillion in student loans, and the debt is projected to reach $2 trillion by 2022. The student debt is a critical issue to address, but there are options for families to manage debt.
There are options for financing a college education, such as financial aid, scholarships, and grants, but they are limited. Private student loans can help cover the difference left of tuition. However, they may have significant drawbacks.
There are two types of student loans, federal and private loans, and both come with advantages and disadvantages. Federal student loans are recorded as financial aid, so families need to fill out the FAFSA to receive loans. However, federal loans have to be paid back with interest, just like private loans. Private student loans are merely loans from private lenders. They tend to work similarly to other loans, with documented information such as a good credit history and having a parent to cosign are necessary.
Most students should use federal loans because of their repayment options and flexibility. However, private loans can be advantageous in some circumstances. They can cover the difference between federal loans, due to the low limits for dependent students ($57,000 total for undergraduate). They can let borrowers take advantage of more flexible borrowing options, as borrowers just need to meet income and credit requirements. They also provide variable interest rates to help borrowers remove some of the stress of paying all of the money upfront. Borrowers can get better interest rates than federal loans if they have a good credit score.
Conversely, the same advantages can hurt inexperienced students or families without a strong financial history. Good credit is required, so either the loans have to be registered with other family members, or students will have to pay higher interest rates. Opting for a variable rate might not save borrowers money, and can come to hurt borrowers later in their careers. There are fewer repayment and forgiveness options with private loans, so if borrowers cannot pay, many have their credit scores ruined.
There are two types of federal loan forgiveness students can opt for — an income-based repayment plan and a public-service repayment plan. The federal government can take a portion (at least 10–20%) of your yearly salary as long as you are earning with the income-based program. The public service plan can include teaching or military service, typically relating to difficult jobs or jobs in underserved areas.
When borrowing private loans, borrowers need to make sure to use them carefully and sparingly. Borrowers can consider other options before turning to private loans. Those options include scholarships, grants, and work-study jobs, which can minimize the number of loans they need to borrow. They should only turn to a private loan once they’ve taken advantage of all federal aid available to them. Borrowers should do their research and can compare interest rates and fees on loans, as well as the borrower protections that are offered. Borrowers should minimize the amount they borrow, so they should only borrow what they need and stick to a budget while they’re in school. Lastly, borrowers should start paying off debt as soon as possible, as interest rates can increase over time, and many private loans begin accruing debt while students are still in school.
There is a maximum that students can borrow of federal loans, with undergraduates being able to borrow up to 57,500 total in federal student loans, and graduate students can borrow up to 138,500 total. The maximum you can borrow depends on the year, financial dependency, and the type of loan. There are three main types of federal student loans: Direct subsidized, direct unsubsidized, and Direct PLUS. There are direct subsidized and unsubsidized loan limits for direct loans, with subsidized loans only being available to undergraduates. There are both annual and total loan limits for these loans. To borrow more after, borrowers need to pay off existing debt. Direct PLUS loans are available to graduate and professional students, and parents of dependent undergraduate students, with no caps on borrowing beyond the cost of tuition minus any financial aid received. Plus, loans tend to have higher interest rates. The alternative to federal loans is a private student loan, with limits that vary by lender. However, most don’t allow for loans beyond the cost of tuition. Advisors recommend an amount of “debt that the borrower can afford to repay in a reasonable amount of time, such as within ten years after graduation,” with “students who graduate with higher amounts of debt risk losing financial stability to make essential career changes or milestones, such as buying a house.” (EAdvisors)
