The Best Student Loan for Your College Education
A Federal or Private Student Loan Pays for Your College Education
The best student loan is a Federal government student loan. It is a safe and affordable way to finance your college education. Borrow wisely for college.
If it is diffficult to repay your student loans, you can have your monthly student loan payments reduced to 15% of your income. You need to know that your student loans will be forgiven after 25 years, provided you have made the required monthly payments. This student loan relief pertains to both public government student loans and private student loans, but you must apply for it.
Plans are also underway to allow you to reduce your student loan payments to 10% of your income, and to forgive your student loans after 20 years.
All federal student loans are now administered by the US Department of Education. You now can choose to consolidate federal and private student loans together to reduce your interest rate.
How Student College Loans Work
With a college student loan, as with all loans, your monthly payment is based on your total debt, the life of the loan and the interest rate. The total cost of the loan is the total interest you pay, plus any closing fees. If the interest rate increases, your payments will increase. Generally, you have 10 to 15 years to pay off your federal and private loans. If you stretch out your college student loan over a longer period, your monthly payments will be lower, but the total cost of the loan will be higher. Avoid a 30-year payment plan if possible, because it will cost you much more over the life of the loan.
Federal Loans are the Best Student Loans
If you need a college student loan, apply for a Federal loan first. These loans have a fixed interest rate rather than a variable interest rate. Interest rates on Federal college loans donít change over time and arenít affected by your credit rating. Federal loans also come with some guaranteed borrower protections in case you have financial problems after college. For example, they offer a grace period to accommodate you if you become unemployed or unable to repay the loan.
Major New Changes to the Federal Student Loan Program
Effective July 1, 2010, major changes were made to the Federal student loan program. Students and their families should find the student loan process simpler, and lower-income students should find more financial help. Here are the changes to the student loan program.
- The federal government will expand its own direct student loan program.
- Banks and other private lenders will no longer get federal subsidies to make student loans. Banks are still permitted to make private student loans, but the federal government won't subsidize them. This will lessen the activity of private banks in the student loan market. The Federal Family Education Loan Program that subsidizes banks in the student loan business is discontinued effective July 1, 2010.
- It is easier for some graduates when they pay back their loans. Certain students with low incomes and large loan balances don't have to pay more than 10 percent of their incomes each month on the loans. Prior to the change, the ceiling on the monthly repayment of student loans for these students was 15%.
- The changes are projected to save the government $61 billion over 10 years, mostly in bank subsidies.
- After 20 years of repayment, your student loan balance will be forgiven. The prior rules called for 25 years of loan repayment before forgiveness.
Before July 1, 2010, there have been two federal loan programs. Under one, the government makes loans directly to students, a program that now will be expanded. The other is the Federal Family Education Loan Program. Under it, banks and lenders make loans that the federal government guarantees or insures. It will end July 1, 2010.
Federal college student loans are available from many different banks and lenders. They may offer you discounts on the fees or interest rates. Many banks offer both federal loans and private loans, so be sure which loan you are signing. The first step is to fill out the FAFSA, Free Application for Federal Student Aid.
Three Types of Federal Student Loans
There are three types of Federal college student loans: The Perkins and Subsidized Stafford loans, The Unsubsidized Stafford loans and the PLUS loans.
- Federally Subsidized College Student Loans are the Best Student Loans. Perkins and Subsidized Stafford loans are the safest and most affordable federal loans. If you can qualify for them on the basis of income, theyíre a great deal, because the government pays all the interest while youíre in school. The interest rate for Perkins loans is fixed at 5%. For Subsidized Staffords the interest rate is fixed at no more than 6.8%. With federally subsidized loans, the government pays your interest while you are in school. Your loan payments can be deferred for six months after you graduate and the government pays your interest during this time, too.
Even after you've begun repaying the loan, you have the right to defer payments for up to three years if you lose your job or suffer some other hardship. If you have a Stafford subsidized loan, based on need, the government will pay your interest for up to three years.
- Federal Unsubsidized College Student Loans are the Next Best Student Loans. Unsubsidized Stafford loans are the next best option, and theyíre available to everyone, regardless of income. Interest is charged while youíre in school, but you donít have to start making payments until six months after you graduate, and you still get the federal borrower protections. The interest rate for Unsubsidized Stafford loans is fixed at no more than 6.8%.
- PLUS Loans, which are only for parents and graduate students, have a higher interest rate of up to 8.5%, but they are still a better deal than private loans. However, parents who own a house will get a better interest rate on a home equity loan than on a PLUS loan.
Private College Student Loans
Private college student loans, sometimes called ďalternativeĒ loans, are much riskier than government student loans. A private loan should be used only as your last resort, after all federal, state and institutional loans. The terms on a private loan will be less favorable. Try to negotiate a fixed interest rate, which is to say, a rate that will never change. Initially, the fixed rate will be slightly higher than the variable interest rate, which the lender will increase later. If a private loan offers you six-months deferred payments after graduation, remember that they are still charging you interest. Start paying your college student loan off as soon as you can.
Avoid a college student loan with a variable interest rate. These are a lot like credit card debt. As the interest rate increases, so will your monthly payments. The interest costs will amount to more than what you borrowed. There was a time in the decade of the 1980ís when variable interest rates went up to 20% and even higher, bringing great havoc into peopleís lives. Avoid a variable interest rate loan.
Shop Around for Private College Student Loans
Think of the student loan process as your first assignment in college. You are the customer. Shop around and compare private loans. Your local bank could be a good first step for a college student loan. You do not have to use a lender from your schoolís Preferred Lender List. A college in the Federal Family Education Loan program, FFEL, must process any loan, not only those of Preferred Lenders.
Be wary, because some schools have accepted ďkickbacksĒ or gifts for putting a lender on their Preferred Lender List. Private loans may come with ďbrand namesĒ so they appear safer and better than they really are. A lender may offer both federal and private loans, so make sure you know what youíre getting before you sign on the line.
If you find a good rate on a private loan, keep talking to other lenders, and see if they will beat that rate. Make sure you get the final deal in writing, and that you understand the limitations and restrictions.
Keep written records of your loan, including your application, and correspondence with your lender, especially the discount and special deals you negotiate. No one will look after your financial interests, if you donít.
How to Evaluate Lender Discounts on College Student Loans
Lenders offer discounts on federal college student loans, which makes it harder to compare lender against lender. If you can negotiate a 1% discount on the interest rate, or a 1% discount to take effect at the start of repayment, youíve done well. The lender may offer, instead, a discount that takes effect after 48 payments, or a 1% reduction in fees, or a 1% reduction in principal after 48 payments. These discounts do not save you much money and are not very valuable to you. Compare lenders. Negotiate before you accept any loan offer.
Lenders offer On-Time Discounts if you are never late with a payment. These offerings are not written into the contract, and can change at the discretion of the lender. Ask if you can still get the discount if you are only late with one payment. Very few students can meet the terms of an on-time discount, so donít factor them into your decision. Ask the lender what percentage of students actually receive the on-time discounts and if they are guaranteed.
The Fine Print on a Student Loan
Twenty Questions Before You Sign
In many cases you wonít see the real terms of your college student loan until youíve already signed up for it, and the cancellation process is usually difficult and hidden in fine print. Ask lots of questions for your own peace of mind.
- On a private loan, youíll want to know what the fees are, what the lowest interest rate and fee combination you can get.
- Ask the lender how long it will take to repay your student loan. On a variable interest loan, there is no way to tell how long youíll be paying for it.
- If the interest rate is variable, is there a limit, a ďcap,Ē on how high the rate can go? Find out how often is the interest rate adjusted, and how is it determined. It will probably be based on the prime rate.
- How long until the lender can start increasing the interest rate?
- What rate can I get on a fixed-rate college student loan loan?
- Is there any penalty for paying off the loan early?
- When do I have to start making payments?
- How long can I defer payments while Iím in school? What if I go to graduate school after my bachelorís degree?
- How often does the lender capitalize the interest? When interest is capitalized, it is added to the loan balance, and included when they compute the interest charge for the next period.
- If I do not make payments while in I am in school, how much will I owe when I finish school?
- Will I lose my on-time-payment discount with just one late payment or if I ask for a change in the payment schedule? What proportion of borrowers actually get the discounts you offer?
- Are your discounts guaranteed, or are they subject to change later?
- Ask if the terms of the student loan will change if the lender sells the paper to another company.
- If I have difficulty making payments because of economic hardship, do you allow me to defer or reduce my payments temporarily? Under what circumstances, and for how long?
- How much can I borrow on a college student loan without reducing my eligibility for federal, state, or institutional aid?
Keep written records of your college student loan, including your application, and correspondence with your lender, especially the discount and special deals you negotiate. No one will look after your financial interests, if you donít.
What Happens If You Donít Repay Your Student College Loan
If you canít make the payments on your college student loan, ask the lender for a deferral. If you fail to pay for 270 days on a federal loan or 180 days on a private loan you're generally considered in default. Your loans will be turned over to a collection agency, and you'll have a black mark on your credit record.
If you default on a Federal student loan, the government can sue you, garnish your wages, seize your tax refunds, and withhold Social Security payments after you retire. Yes, some people are still paying off student loans after they retire.
If you file for bankruptcy, your college student loan will not be forgiven
. However, take heart. In this country we donít send people to prison for nonpayment of debt.
Tax Benefits of Student Loan Interest
On your federal tax return, you can deduct the interest you pay on a qualified college student loan, as long as no one claims you as a dependent. The interest can be deducted even if you donít itemize deductions.
Alternatives to a Student Loan for College
How should you pay for your college costs? Before you consider which student loan is best, find free or cheap money for college. Instead of a college student loan, or in addition to a loan, look around for other sources of money. Here are your best sources of college money.
- Grants and scholarships, based on financial need, ability and other criteria, are your best source of money, because they donít have to be repaid. Talk to a financial aid officer at college to see if you are eligible for more grants.
- A home equity loan is less expensive than even the best private student loans, if that option is available.
- Your parents may withdraw money from their IRA without any penalty if it is used to pay the higher education expenses for themselves, their children or their grandchildren.
- Perhaps someone else in the family is willing and able to help you out with a personal loan.
- Resist the temptation to borrow more to cover your living expenses. Instead, plan on working a part-time job during college.
- Choose a less expensive school in your home state to save on tuition.
- Downsize your living expenses as much as possible.
- Attend a local college and live at home if you can.
- Consider selling your car and taking public transportation.
- Consider a lower standard of living for yourself.
- Consider delaying college while you work and save for a year.
- Attend an inexpensive community college for your first two years, and then transfer to a four-year college.
These temporary deprivations during your school years will save you the cost and worry of expensive college student loans. They are your best sources of money.
I hope life brings you much success. I wish you a very happy day.
----- Surfer Sam