Over 70% of families finance a portion of their children’s education. Understanding your options, the legal responsibility, and repayment options need to be part of the college decision. Depending on the college and the state you live in, there could be various types of loans available in the financial aid award letter, that you need to understand.
Student loan planning is different since there are annual limits and repayment options based on the types of loans. If these decisions were so easy, we would not have more than 46 million borrowers that owe more than 1.7 trillion dollars. Nationally, even with 0 interest rates due to COVID the total student loan debt balance increased 2.9% in 2021 according to educationdata.org.
Families and students do not understand the types of loans available in the Financial Aid award letter. Before any loans are taken, every student should have a basic knowledge of the various types of loans available to pay for college and what the loan repayment will look like at graduation.
Why is Student Debt Structure is so Critical?
Unlike most loan approvals, access to student loans is much easier and quicker. Borrowers do not see the financial consequence until years later and that is the problem. Most students do not worry about their student loans total until after graduation. With most other loans, the repayment process is almost immediate while student loan repayment could be delayed years before repayment will begin.
What is often overlooked in student loan planning, is the student debt structure. These borrowing decisions will determine the loan repayment option in the future. Little adjustments in these decisions can reduce the parent’s legal exposure and credit rating. A dependent student is limited to just over $31,000 in their name and any loans over that amount will require a co-signer or parent direct loan.
It is also important to understand the type of loan a borrower uses. Direct Federal Student loans offer better repayment and forgiveness options.
Why should families use Direct Federal Student Loan First?
To qualify for Direct Federal Student Loans, the student must submit the FAFSA. Once the FAFSA is completed, it is possible to see both a Subsidized Direct Loan and an Unsubsidized Direct Loan on your award letter. Your need at each college will determine if you receive just an Unsubsidized loan or a combination of both the Subsidized and Unsubsidized loans.
To qualify for a Subsidized Direct Loan your Expected Family Contribution (EFC) must be below the Cost of Attendance (COA) at that college. If the family’s EFC is above that amount, then you will only see an Unsubsidized Direct Loan.
The difference between the two loans is that a Subsidized Direct Loan interest is paid while the student is in college. An Unsubsidized Direct Loan will be charged interest while the student is in college. The Direct Loans are sometimes called Stafford Loans on the award letters.
These Direct Federal student loans should be taken each year as it will improve the student debt structure for repayment and future debt if a postgraduate school is in the plans. These loans have both annual and lifetime limits based on the student’s academic progress. For freshman year, the limit is $5,500 in total. Within that total, a student could have up to $3,500 in Subsidized Direct loans.
Why should you ignore Parent PLUS Loans on the Award Letter?
Some colleges will include a Direct Parent PLUS loan in the list of award letter items. These loans are legally the parents and can be misleading in determining the true net cost of the college. They are a possible financing option but should be ignored during the college cost comparison. The PayForED College Cost Analyzer helps families properly organize which loans should be entered when comparing the award letters.
The Parent PLUS Loans have higher rates and fees compared to the Direct Student Loans. Like the other loans, there is a limit to the amount accessible under the Parent PLUS loan. To find your allowable amount, subtract the cost of attendance from the financial award.
What are State and College Loans?
There are colleges and some states that offer student loans as part of their financial award packaging. The student will need to evaluate these loan terms and compare them to the alternatives. These loans do not qualify for the federal loan repayment and forgiveness options.
When does the Federal Interest Rate on Student Loans change?
The federal interest rates are not established at the time of the award letters. They are based on the Treasury auction that happens in May. The new rates are established and become effective on July 1 of each year. You are unable to pre-borrow the money. The federal loan interest rate is based on the time of distribution.
Student Loan Award Letter Summary
One of the most important details for a student’s financial future is the amount of debt they will graduate with and how it is structured. The PayForED software helps students and parents make informed decisions by increasing the transparency to the outcome.
PayForED believes families need to understand their student loan options concerning their college affordability decision and planning. The PayForED student loan solutions provide the missing transparency that helps students avoid excessive student loan issues. This information allows for better borrowing decisions and helps families understand the types of loans available on the financial aid award letter.
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