Finding the Right Student Loan
Finding the right student loan for your needs takes some thought and careful research. Not all student loans are equal. Some require repayment begin right after graduation. Others give the recent graduate up to nine months to find a job and earn some income before that first loan payment comes due.
CheckRates.com takes you right into the financial aid office with advice for borrowers and head-to-head match-ups between student loan lending sources.
Fast. Easy. Convenient. Frugal.
Types of Student Loans
Loans for tuition and books and that dorm room come in two basic types: needs-based and non-needs based.
The objective of all student loans is to enable college students to further their educations. Loans are determined to be needs-based or non-needs-based using a formula of total family income and outgo, family assets, availability of scholarship or grant funding and other factors used to determine the family’s expected contribution to the child’s education.
Households with higher earnings and/or lower expenses are expected to assume more responsibility for paying college costs. Lower income households are expected to pay a smaller portion of total family earnings, again, based on a formula determined by the university and the federal government.
Calculating Success
The less you have to borrow the better. Student loans are made through local banks and university financial aid offices but are backed (insured) by federal tax dollars. This allows lenders to offer loans at lower rates since the loan is backed by Washington, D.C.
A typical graduate from a four-year state school will owe as much as $40,000. A private university will create an even larger debt. Parents should consider college costs as an investment in the future. An individual with a college degree can easily earn more than $600,000 over a career than an individual without a degree. In fact, the number can be significantly higher for some occupations like medical professionals and investment bankers.
A student loan is typically paid off monthly to the local lender. With a lower rate of interest, a monthly student loan payment typically runs between $200 and $400 a month – about the cost of a car payment according to experts.
So, in crunching the numbers, consider the following:
- How much can the family afford to contribute currently?
- How much can the family afford to contribute during a four-year stint in college, i.e. are younger siblings going to place additional demands on household income?
- What is the earnings potential for the student. The starting salary for a professional within a specialized field is a great place to start your calculations. For example, a doctor can be expected to earn more than an adjunct professor of philosophy at a community college. Therefore, that faculty member will have a much harder time paying off that loan than the medical doctor, lawyer or other highly-educated professional.
- Student loan payments may also be lowered when professionals, like teachers and physicians, take positions in under-served regions of the country. Thus, if the student chooses to work in remote rural country or within certain urban areas, loans may be forgiven entirely over time. Something to think about before signing on the dotted line.
- Is there scholarship or grant money available through the school’s financial aid office? Contact a financial aid representative as soon as the student is accepted at the school of his/her choice. The more time you give the university to compile a financial aid package the better.
The Federal Stafford Loan
This loan is available for graduate and undergraduate students. A Federal Stafford loan is a simple interest (non-compounded), government guaranteed, no collateral loan. In July, 2007, the interest rate on Stafford Loans was fixed at 6.9%, putting them within reach of most families. Repayment of these loans begins six months after leaving school or graduation.
The amount of the loan is fixed for each year in school. Married students and students who are independent from their families (not declared as a deduction on the family’s tax returns) often qualify for higher annual amounts, but again, that money has to be paid back so, even though the Federal Stafford Loan program offers opportunity, it also comes with a lot of responsibility – responsibility the student or family will carry for many years after graduation.
The Federal Parent PLUS Loan
The Parent Loan for Undergraduate Students (PLUS) is a non-need based, simple interest, government guaranteed loan with a fixed rate of 8.6%.
These loans are ideal for families that choose to finance the entire cost of college if the family meets government established guidelines. The Parent PLUS requires that the loans be paid in full within 10 years of graduation – an important factor in your borrowing calculations. There are no prepayment penalties and monthly payments are low thanks to that preferential, fixed rate.
Alternative Financing
Alternative loans fill the gap between what the family or student receives from all financial aid sources and what’s needed to cover college costs. And that gap can be many, many thousands of dollars each year.
Many private financial institutions offer student loan products that can be tailor made to fit financial needs. Options include:
- no loan origination fees
- low, fixed interest rates
- no payments due until graduation or the student leaves school
- flex-pay options once repayments begin
- borrower benefits like tying the loan to a home equity credit line.
By the way, consider that last benefit carefully – especially if you have a great deal of home equity. A home equity credit line delivers a preferential rate because the loan is collateralized (backed) by the family home.
Further, with a line of credit, you only pay interest on the money you borrow. So, instead of taking a $50,000 second mortgage and paying interest on the full loan amount, a line of credit saves on interest payments because you only pay for the credit you use.
Word of Warning
Avoid service providers that “guarantee” scholarship and grant money. These companies require a non-refundable payment to search the same records and talk to the same people you can. The web has made borrowing for school easier for all of us and these companies that “guarantee” financing can’t guarantee anything. They have no control over how financial aid is allocated.
The Application Process
Once you’ve discussed financial needs with the financial aid representatives of the student’s school and determined that a government-backed loan (see above) is in your future, begin the application process. ASAP.
Step one of the application process is to complete a Free Application for Federal Student Aid (FAFSA) form. These are available on the U.S. Department of Education’s FAFSA web site and can be completed online.
This application is then sent to all of the colleges that the student indicates. The FAFSA application should be submitted as close to January 1st of the student’s senior year in high school as possible.
Hard copy of the FAFSA application is also available through any financial aid office. In fact, it might be a good idea to set up an appointment with a financial aid officer and pick up the application in January of the student’s senior year. Hard copy of the application may also be available through the high school’s guidance department.
If the student plans to apply for early acceptance at a college or university, the process of completing the financial aid application, whether through the financial aid department or on line, must be moved up with all paperwork in place not later than September 1st of the student’s senior year. Most schools will accept FAFSA applications for consideration of cases of early acceptance.
If you opt for a private lender, make sure the institution accepts FAFSA applications and adheres to the guidelines mandated by the federal government. And of course, if you choose to finance a college education with private, consumer loans, start with your current mortgage lender. This bank or other lender will have your information on file and will be able to determine your payment history with a few clicks.
One final, important point: the decision to borrow money for school should not be taken lightly by the borrower(s). All financing options should be weighed for their pros and cons. For example, the family may choose to fund four years of college through a home equity line of credit to forestall loan repayment until the college graduate has established earnings sufficient to assume monthly loan payments.
Consider all options and the consequences, not only during the college years, but in the years that follow graduation
