By John Christianson
With all of the press on how our “collective” college graduates in our country have accrued financially suffocating student loans, it is all the more imperative that all prospective college students and their families think about the following:
Federal Student Loans
Federal student loans (also known as Federal Direct Loans) are the most attractive loans for several reasons. Federal student loans carry the lowest interest rate, currently at 4.45% for the 2017-2018 year. Subsidized federal student loans are at the top of the pyramid, as in-school interest payments are covered by the government while the student is in school. Only lower income students with demonstrated financial need are eligible. Unsubsidized federal student loans also carry an attractive 4.45% rate, only differing in that the student must either pay the interest while attending college, or capitalize the loan, increasing the principal, or total amount of the loan due. Federal student loans not only carry the lowest interest rate, but they also carry attractive built-in death and disability provisions that eliminate the loan in the event of the student’s death, or total disability. All federal student loans don’t require students to have any established credit.
Federal Parent Loans
Federal parent Loans, called Federal Direct PLUS Loans, currently carry a higher interest rate of 7.0% for the 2017-18 school year. These are loans taken by parents and cannot be transferred to a student—these are liabilities that parents must really think seriously about before undertaking. Unlike federal student loans, Direct PLUS Loans require some established credit, although at a pretty minimal level. Federal parent loans also share the death and permanent disability benefit provision that the federal student loans carry. Parents must really give serious thoughts to this loan, however, as this loan generally cannot be discharged in the event of financial distress, or bankruptcy. Think for a moment about how painful losing a home to foreclosure can be for a family. At least in this situation, a family only loses the home. However, if a parent takes on a federal parent loan, the loan can follow the parent forever, well into retirement.
Private Student Loans
Last are the private student loans. I don’t want to minimize these loans and negate their value. Private loans can provide the bridge needed to fund a valuable college education. However, they must be weighed against the cost of potentially mortgaging your future. A private student loan is signed by the student, but co-signed by a parent (or another adult). There are no death or disability provisions built-in as there are in the case of federal student or parent loans. Interest rates are set by the private market, but are generally higher when the co-signer’s credit score is lower, and slightly lower than the interest rate for federal parent loans when the credit score is higher. Many, if not most of these loans, have a very harsh “due on death” clause. If the co-signer passes away, the student must pay the full amount of the loan right away, or the loan will go into default.
Summary
Federal student loans are the most attractive, with parent loans and private loans less so. As a guide, students should try to avoid as much debt as possible, and shouldn’t graduate with a loan amount exceeding their first year salaries. For example, if a student’s projected first year salary is $35,000.00, then accruing a loan amount equal or less than that amount should allow the student to repay the loan amount within 10 years. Perhaps most importantly, attending a lower cost college and/or receiving greater amounts of grants and scholarship, can go a long way to reducing debt.
With all of the press on how our “collective” college graduates in our country have accrued financially suffocating student loans, it is all the more imperative that all prospective college students and their families think about the following:
- Minimizing student loans.
- Understanding the terms of different types of loans so you can choose the more attractive loan packages.
- Selecting colleges whose financial need packages are composed of a greater percentage of grant money that you don’t need to pay back.
Federal Student Loans
Federal student loans (also known as Federal Direct Loans) are the most attractive loans for several reasons. Federal student loans carry the lowest interest rate, currently at 4.45% for the 2017-2018 year. Subsidized federal student loans are at the top of the pyramid, as in-school interest payments are covered by the government while the student is in school. Only lower income students with demonstrated financial need are eligible. Unsubsidized federal student loans also carry an attractive 4.45% rate, only differing in that the student must either pay the interest while attending college, or capitalize the loan, increasing the principal, or total amount of the loan due. Federal student loans not only carry the lowest interest rate, but they also carry attractive built-in death and disability provisions that eliminate the loan in the event of the student’s death, or total disability. All federal student loans don’t require students to have any established credit.
Federal Parent Loans
Federal parent Loans, called Federal Direct PLUS Loans, currently carry a higher interest rate of 7.0% for the 2017-18 school year. These are loans taken by parents and cannot be transferred to a student—these are liabilities that parents must really think seriously about before undertaking. Unlike federal student loans, Direct PLUS Loans require some established credit, although at a pretty minimal level. Federal parent loans also share the death and permanent disability benefit provision that the federal student loans carry. Parents must really give serious thoughts to this loan, however, as this loan generally cannot be discharged in the event of financial distress, or bankruptcy. Think for a moment about how painful losing a home to foreclosure can be for a family. At least in this situation, a family only loses the home. However, if a parent takes on a federal parent loan, the loan can follow the parent forever, well into retirement.
Private Student Loans
Last are the private student loans. I don’t want to minimize these loans and negate their value. Private loans can provide the bridge needed to fund a valuable college education. However, they must be weighed against the cost of potentially mortgaging your future. A private student loan is signed by the student, but co-signed by a parent (or another adult). There are no death or disability provisions built-in as there are in the case of federal student or parent loans. Interest rates are set by the private market, but are generally higher when the co-signer’s credit score is lower, and slightly lower than the interest rate for federal parent loans when the credit score is higher. Many, if not most of these loans, have a very harsh “due on death” clause. If the co-signer passes away, the student must pay the full amount of the loan right away, or the loan will go into default.
Summary
Federal student loans are the most attractive, with parent loans and private loans less so. As a guide, students should try to avoid as much debt as possible, and shouldn’t graduate with a loan amount exceeding their first year salaries. For example, if a student’s projected first year salary is $35,000.00, then accruing a loan amount equal or less than that amount should allow the student to repay the loan amount within 10 years. Perhaps most importantly, attending a lower cost college and/or receiving greater amounts of grants and scholarship, can go a long way to reducing debt.
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