There’s been a lot of talk about the cost of college, student loans, and student loan forgiveness — with good reason. According to eLearningWorld, tuition fees have increased 4.6 times more than inflation over the past 50 years. It is therefore not surprising that approximately 70% of families who send a child to university apply for funding. As of July 2022, approximately 48 million American borrowers owed nearly $1.75 trillion in student loan debt (StudentLoanHero.com). That’s a lot of money.
When figuring out how to pay for a college education, you first need to know how much it will cost to graduate. Then, once you have that final figure, look at your 529 plan, other investments, grants, scholarships, education tax credits, and personal cash flow.
When you add all of these things up and the result is negative, you have to figure out how to fund the shortfall, and the answer could be student loans.
What type of loan
You may have heard of federal student loans, private student loans, PLUS loans, and subsidized and unsubsidized loans. Which is good for you?
In most cases, borrowers should apply for federal student loans first, as they can offer repayment and forgiveness plans that private lenders typically do not. You must complete the FAFSA (Free Application for Federal Student Aid) form to apply for a federal loan. I recommend you read the article published on September 26, 2022 and written by my colleague, Abby VanDerHeyden, on the process and importance of completing the FAFSA.
Federal direct loans
- Subsidized Federal Direct Loans are need-based loans available to undergraduate students who attend school at least half-time. The school determines how much you can borrow, and the federal government pays interest on the loan until the student graduates.
- Unsubsidized Federal Direct Loans are not need-based and can be used for undergraduate and graduate study expenses. The school still determines how much you can borrow, interest accrues while the student is in school, and interest can be paid as you go or added to the loan balance.
Federal Direct PLUS Loan (parental loans to an undergraduate student)
- These loans allow parents to borrow funds for their children’s education. This loan is not based on need and qualified borrowers can borrow the full amount needed for the student’s education. Fixed monthly payments are amortized over several years and repayment can be deferred until the student graduates; however, the interest on the loan continues to grow during this period. It is important to note that PLUS loans cannot be transferred to the child.
Private student loans
- These loans are available from financial institutions and are usually based on the creditworthiness of the co-signer. Often, private student loans are the least flexible and difficult to restructure. It should also be noted that in the event of the student’s death, direct federal loans are forfeited, while private loans remain an obligation of the co-signer.
Student loan debt is financially crippling for many, and it’s important to make sure you can afford the loan repayment. Generally, your student loan debt should not exceed your estimated starting salary.
If you find yourself in a situation where paying off your loan is financially difficult, contact your loan service provider to work out a new repayment plan. If you have a federal loan, determine if you qualify for a forgiveness with the Public Service Loan Forgiveness Program or if you qualify for a deferral or forbearance.
Ignoring and not paying your student loans could lead to late fees, a damaged credit score, and wage garnishment.
Whereas the average cost of going to college has increased by 2700% or approximately 4.6 times the rate of inflation over the past 50 years, it’s no surprise that more and more people are applying for student loans to pay for their education. However, make sure the debt is manageable so that you are on the right career path and on the right financial footing.
Meredith Carbrey, CFP, is a Senior Wealth Advisor at Bedel Financial Consulting, Inc., an Indianapolis-based wealth management firm. For more information, visit their website at www.bedelfinancial.com or email Meredith at [email protected].