An Expert Discusses How Student Loans Work
Having to learn about the Basics of the Student Loans at the point during the college admissions process when every parent is “just, plain exhausted” can seem like cruel and unusual punishment.
But, if you know you will need to borrow money for your child’s college education, understanding everything you can about loans will only serve to help you make the most educated and financially sound decision for you and your family.
So, it’s worth it!
Angela Colatriano, Chief Marketing Director of College Ave Student Loans joined us for a Facebook Live recently, and she provided us with what every family needs to know about how student loans work.
Types of Federal Student Loans
Filling out the FAFSA is the only way you can gain access to federal loans. In addition, some schools use this information when they consider your student for merit aid. So, fill it out, regardless.
Both Unsubsidized and Subsidized Direct Student Loans are the most common student loans.
These types of loans are both in the student’s name and offer different limits by year: up to $5,500 the first year, $6,500 the second year, and $7,500 for years three and four.
Dependent on what the school costs and what you might still need in addition, the maximum amount you can borrow over the life of your education is $31,500.
A family’s financial need determines whether a student receives a Subsidized or Unsubsidized loan.
The U.S. Department of Education pays the interest on a Direct Subsidized Loan while you’re in school at least half-time.
Students with Direct Unsubsidized Loans are responsible for paying the interest during all periods.
Both of these loans typically offer the lowest interest rate your student will find—approximately 4.53% with a 1% origination fee.
College Ave Tip: Because of the low interest rate, subsidized and unsubsidized federal student loans should be considered before any other type of loan. They will be your best starting point.
How Do Parent PLUS Loans Work?
If your student finds they will need additional funding, the next type of loan you might want to consider will be the Parent PLUS loan, from the federal government.
The maximum PLUS loan amount you can borrow is the cost of attendance at the school your child will attend minus any other financial assistance they might receive.
As of July 1st, 2019 the interest rate on the Parent PLUS loan is 7.08% with a 4.248% origination fee.
Any parent or legal guardian may borrow the Parent PLUS loan as long as there are no bankruptcies or prior loan defaults in their credit history.
There may be some other requirements, but none that would be as stringent as that of private loans.
If a parent is rejected from receiving a Parent PLUS loan, the student is eligible to borrow additional money through the Direct program, usually between $4-$5,000.
A Parent PLUS loan is solely the parent’s financial responsibility.
It is in the parent’s name, and it affects the parent’s credit history.
College Ave Tip: If you have any questions, don’t hesitate to call the school’s financial aid office or contact https://studentaid.ed.gov/
How Do Private Student Loans Work?
If you are researching Parent PLUS loans, it would also be a good idea to start looking into private loans.
In many instances, depending upon a parent’s credit score, private loans can offer a lower interest rate.
In addition, if a parent is not comfortable taking on the sole responsibility of paying for a child’s education, a private loan may offer more options than a Parent PLUS loan.
One of those options is having a cosigner — Because 18 year-olds do not generally have a good, if any, credit history, they cannot obtain a loan on their own.
For that reason, they will need someone to cosign their loan.
Determining who that person will be can be based on who will have the best credit rating and thus potentially get the best/lowest interest rate.
Keep in mind that this person agrees to repay the loan if the student is unable or unwilling to make the loan payments.
A positive aspect of a private student loan is that it gives the student some “skin in the game.”
A negative aspect of this type of loan is that if the student is late with a payment or defaults on the loan, it damages the credit history of both the borrower and cosigner (you).
Parent who cosign loans for multiple children are taking a huge risk and should think very seriously about the implications that will have on their financial future.
When taking out a loan of this type, it is prudent to check whether the lender offers a “Cosigner Release, “ a clause that enables the cosigner to eventually bow out of any responsibilities when the student is deemed creditworthy.
How Do Private Parent Loans Work?
Private Parent loans are relatively similar to Parent PLUS loans in that they involve only the parent taking the borrowing responsibility.
The student’s name is not on this loan.
Not every lender offers this type of loan—College Ave Student Loans is one of the few that does.
College Ave Tip: Shop around! If you have a strong credit score, you very well may be able to get a better rate on a private loan than on a federal loan.
What Is Student Loan Pre-qualification?
If you attempt to “prequalify” for a loan, the lenders will do what they call a “soft credit hit” and evaluate your creditworthiness.
This will not affect your credit, so it’s highly recommended to prequalify if you can.
Not all lenders offer this option.
(College Ave does have a prequalification tool.)
College Ave Tip: If you do shop around for lenders, do it within a 30-day period, so the credit bureau will understand your shopping behavior and not “ding” you adversely.
What’s the Difference Between Fixed vs. Variable Interest Rates?
All federal programs will only offer fixed-rate loans.
Private lenders tend to offer a choice of either a fixed interest rate, which stays the same for the life of the loan, or a variable rate which will fluctuate (go up or down) over time, depending on the market.
The variable interest rate is usually lower than fixed interest rates, however there are no guarantees that it will remain as such.
Anyone who is averse to taking risks and more comfortable with consistency should not consider a variable rate loan.
It is also more difficult to create a dependable budget when one takes on a variable rate loan.
To the uninformed, the Student Loan Process can be a scary place. But with some education, research, and introspection, a parent (or guardian) can make a good decision that will help pay for their child’s education, and keep their financial future intact.
Once Angela completed her “Basics of Student Loans” Parent Orientation, many of the parents who watched this very informative Facebook Live had the opportunity to ask some additional questions.
For more insight in to Student Loans, watch the video here.
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This post is sponsored by College Ave Student Loans.