Get the facts before you borrow
Financing a college education isn’t easy. While going into debt may be unavoidable, you should get the facts before you borrow. A few smart borrowing tips will help reduce your debt burden.
Not sure where to start with financing your education? Begin with filling out the Free Application for Federal Student Aid (FASFA). The FASFA is required for all federal aid programs. Filling out the FASFA will help determine which aid packages will benefit you most and help with planning college expenses. For more information about the FASFA, visit: www.fafsa.ed.gov.
Determine a Loan Type
Student loans fall into two categories, federal loans and private loans.
Federal loans are provided by the federal government and are subject to oversight and regulation. Common federal student loans are Direct Loans, Pell Grants, PLUS loans, and the Perkins Loan Program. Federal loans offer many benefits over private student loans including lower interest rates, extended repayment options, and the ability to postpone payments if you experience unemployment or economic hardship.
Private loans do not provide the benefits and protections available with federal loans. Private loans have higher fees and interest rates than federal loans and do not offer the same repayment options available with federal loans. Also, private loans do not offer deferment or forbearance options for financial hardship.
Paying for college is a long-term financial obligation. Exhaust all federal loan options before considering private loans. To learn more about public and private loan options, visit: www.studentaid.ed.gov.
Minimize Student Loan Debt
Your total education debt at graduation should be less than your expected starting salary. Otherwise, you will have difficulty repaying your student loans and may be at risk of student loan default. Having high student loan debts can keep you from owning a home, accumulating savings, or building wealth. Keep your loans to a minimum by borrowing only what you need to pay for classes. Every dollar you borrow will cost you about two dollars by the time you’ve repaid the debt.
Don’t Miss Payments
One quarter of borrowers are late or delinquent on the very first payment on their student loans. Most student loans have a six-month grace period before repayment begins. Loan payments are due even if you have not received a statement or coupon book for repayment. Be sure to know your lender after graduation to avoid delinquency or default. If you are experiencing financial hardship and need help locating your lender, contact the National Student Loan Data System, www.nslds.ed.gov.
Federal Student Loan Repayment Plans
There are four main types of federal student loan repayment plans: Standard Repayment (10 year term), Extended Repayment (10 to 30 year term), and Graduated Repayment (payment amounts are increased every two years), and Income-Based Repayment (payments as a percentage of monthly income). To qualify for income-based repayment (IBR), you must have a partial financial hardship. You have a partial financial hardship if the monthly amount you would be required to pay on your IBR-eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under IBR. For more information about federal repayment options, visit the Student Loan Borrower Assistance Project: www.studentloanborrowerassistance.org.
Dealing with Financial Difficulty
A temporary suspension of loan payments is best for short-term financial difficulty such as unemployment or medical leave. Examples of temporary suspensions include an economic hardship deferment (3 year limit) and forbearances (5 year limit). Changing repayment plans is a better option for longer-term financial difficulty such as high debt-to-income ratio. Examples include income-based repayment and extended repayment, both of which reduce the monthly loan amount. All of these options increase the total loan amount by increasing the total interest paid over the life of the loan. But they are better than defaulting on the loan, which also adds fees and penalties.
Penalties for Defaulting on Your Loan
Penalties for defaulting on student loans are severe. The federal government has the power to compel payment; the federal government can garish up to 15% of your wages and Social Security benefits and take federal and state income tax refunds to repay student loan debts. You may be charged late fees up to 6% of each late payment and collection charges of up to 25% may be deducted from each payment on a defaulted loan. The federal government can block the renewal of professional licenses. And you will be ineligible for more federal student aid. Defaulting may prevent you from obtaining future credit, auto loans, or a mortgage and make it harder to rent an apartment or get a job.
Get Help with Student Loan Debts
While there are options for managing student loan debts, you lose access to these options if you default on your loans. For more information about student loan debt consolidation, income-based repayment plans, extended repayment, or public loan forgiveness, visit: www.studentloans.gov.