This is a segment of Bautis Financial’s college planning series, which includes webinars, podcast episodes, blog posts and downloadables to aid college-bound students and families in the admissions process. Visit our college planning hub for more valuable resources.
It wasn’t until the early 90’s that borrowing money became a widely used tool to pay for college, making it a relatively new concept. Most parents of prospective students at that time either didn’t go to college or didn’t use loans as part of how they paid. Now many of those students from the early 90’s are parents with kids discovering how to pay for college. They know first hand how these loans play a part in the lives of graduates, and are desperate to minimize the struggles they may be experiencing for their children.
With that said, the reality is most students will need to use some form of borrowing to cover their education. Today, as much as 69% of students will graduate with loans in the average amount of $30,000. Every graduate’s situation may be different depending on the career they expect to have after graduation and their ability to pay the loan off. This is why it is important to have an understanding of the different loans available and how each might fit your unique needs.
Different Types of Loans
There are three main categories of loans: Federal, private and consolidation or refinance loans. Federal loans are issued as subsidized or unsubsidized loans, based on the financial need of the student. Private loans and refinance loans are issued by financial institutions, like banks and credit unions, as well as by the state government. You can apply for federal loans with the FAFSA and the private loans are applied for directly with the institution.
Federal Direct Loans
Federal direct loans are the most flexible option. They offer payment plans based on income and loan forgiveness programs for graduates who work with qualified institutions. These loans are issued by the federal government, and the interest rates are determined by congress. They may be available in two different types.
The first type is subsidized. Its availability is determined by the financial need of the student. The majority of these loans are awarded to families with adjusted gross incomes of less than $50,000. Because of the students’ determined need, the government will pay the interest on these loans while the student is in school, and during payment deferment periods including the six months after graduation. These are only available to undergraduate students.
The second type is unsubsidized. They are available to all students regardless of their determined financial need. These loans will accrue interest while the student is in school and during all deferment periods and will need to be paid by the student. These loans can be utilized for both undergraduate and graduate education.
These loans do have limits. Undergraduate students attending a typical four-year college can borrow a maximum of $27,000 and an additional $4,000 for undergraduate degrees requiring more than four years. Students who are studying for graduate and professional degrees, such as a law degree, can borrow a maximum amount of $138,500. The cumulative limit for medical students is $224,000.
These loans are designed to allow parents to borrow more if needed after the direct loan program has been maxed out. The amount that will be awarded on all other aid and loans that were granted as well as the cost of attendance. They will essentially award what the need is after all other options have been considered. Qualifying for these loans will depend heavily on the parent’s credit score, and in the cases where parents do not qualify, the student will be able to borrow more from the direct unsubsidized loan program. In these cases, the maximum amount will be raised to $57,500 from $31,000. Parents must be very careful when it comes to PLUS loans. Do not fall into the “parent trap” of biting off more than you can chew to help your children.
Students can also apply for private loans with financial institutions such as banks and credit unions. The approval of these loans will be directly related to the student’s ability to pay them off and heavily determined on the credit rating of the student. They can be consigned to improve the chances of approval. These can be especially attractive options to parents and students with good credit scores, because they will typically receive better interest rates than PLUS loans. These loans can be applied for by both the student and the parents, but they are typically applied for by the student. With that being said, most of the loans applied for by students have a cosigner. About 90% of private college loans have a cosigner. Strong consideration should be given by the cosigner where 25% of private student loan cosigners ages 50 and older had to make a loan payment because the student borrower failed to do so.
As you can see, there is a lot to think about when considering paying for college using loans. If you need help working through these options or if you have any questions concerning paying for college, book a free consultation to discuss how our financial advisors can be a college planning resource.