Student Loans Information Guide: Understanding Your Options
Out of all the things in life in which you could potentially invest, your education is arguably the most important. Your schooling will not only prepare you for the workforce, but will hopefully shape you into an individual who is capable of making decisions that will impact the world for the better. However, as too many of us know, receiving a solid education is an incredibly expensive endeavor. There are few of us who (or whose parents) can pay out-of-pocket for the astronomical expenses of tuition, books, living expenses, and many unforeseen costs that come hand-in-hand with education. Luckily, there is still a way for hardworking Americans to receive the educational experiences they need and deserve: when financial aid and/or scholarships fail to cover your school-related expenses, there are student loans. Receiving and repaying student loans can be very complicated, so we advise you read on and educate yourself about the smartest options for financing your education.
What are Student Loans?
Simply put, student loans are money that is borrowed, usually from the federal government, to finance your education. It is important to note that unlike financial aid, loans are not "free" money. They must be repaid with an interest, meaning that you will be paying back more money than you borrowed. How much more money you will need to pay back will depend on how long it takes you to repay the loan. For example, because of interest, someone who takes five years to pay off a student loan will pay less overall than someone who takes ten years to pay off the same student loan. Like any market, there are different types of student loans available that vary by such factors, as their interest rates, lenders, repayment options, borrowing limits, and the amount of money awarded. For instance, the U.S. Department of Education offers Direct or FFEL Stafford Loans, which are low-interest loans meant to pay for students' education beyond high school.
Of course, before you can receive any loan, you will need to apply. The application process begins with filling out the Free Application for Federal Student Aid, commonly known as the FAFSA. The information you provide on the FAFSA, such as your personal income, your parents' income and assets, the size of your household, and the number of family members attending postsecondary institutions, will be used to determine how much money you are eligible to receive in the amount of a need-based loan (ED.gov). You should check with your school for specific FAFSA application due dates, but usually, you must complete the FAFSA by March or early April. If all of the necessary material is fully completed and turned in on time, then you will eventually receive a notification from your school that includes the types and amounts of loans you are eligible to receive.
Before you decide to accept any student loan, you should know and understand all the options available to you. For example, under the Direct or Federal Family Education Loan Program, you can choose from unsubsidized Stafford loans, subsidized Stafford loans, federal PLUS loans, or federal consolidation loans. With subsidized loans, you will not be charged interest while you are at least a half-time student, during the grace period after your graduation, or during deferment periods. Additionally, subsidized loans are based on your financial need, so you are more likely to receive them if you or your family is undergoing real financial hardship. On the other hand, unsubsidized loans start charging you interest from the minute you begin school and are not based on your financial need. There are also PLUS loans, which are meant to provide some extra financial cushioning for graduate students and for the parents of dependent students. Like unsubsidized loans, you will get charged interest for PLUS loans from the very beginning (Federal Student Aid). Another loan option is through the Federal Perkins Loan Program, which is available at over 1,800 postsecondary institutions (ED.gov). All of the loans just mentioned may be combined in your award package.
Another important consideration you must make before accepting any loan is how you are going to pay it off. Loan repayment is a serious matter, and if payments are missed, you could severely damage your credit and fall into poor standing with the federal government. For a little help with forming a repayment plan, you should utilize the Department of Education's repayment calculator.
What is Student Loan Deferment?
With student loan deferment, you can postpone your loan repayments without being charged interest. However, you must meet certain eligibility requirements in order to defer. For instance, you may be considered eligible if you have completed active duty service in the U.S. Armed Forces or National Guard, if you are unemployed or considered to be experiencing "economic hardship," if you are attending an eligible postsecondary school as at least a half-time student, or if you are attending an approved disability rehabilitation program or a graduate fellowship program as a full-time student. If you fit any of the aforementioned descriptions, you should check with your loan servicer and find out how to submit a request for deferment. With your request, you should prepare to provide some proof of eligibility (Federal Student Aid).
What is Student Loan Forbearance?
Similar to student loan deferment, student loan forbearance is an option for those who do not qualify for deferment, but who are still struggling to make loan repayments on time. With student loan forbearance, you can stop making loan repayments for a specified period of time, make smaller payments over this period of time, or extend the repayment deadlines. Especially in this poor economy, there may be any number of reasons for needing a forbearance. For instance, you may fall ill and get bombarded with medical bills that drain your bank account, making loan repayments difficult. Or maybe you encounter a significant life event that requires you to take some unpaid time off work to deal with it. Even still, you could be participating in a medical or dental residency, during which you must scrape up your change just to afford food, let alone student loans. There are countless reasons why someone could need forbearance. If you have a build-up of student loans while in a financially compromising position, check with your loan servicer to see about forbearance (Federal Student Aid).
What is the Post-Graduation Grace Period?
After you graduate, there will be a certain period of time, for which you do not have to worry about paying back your student loans. This is known as the post-graduation grace period, and its length will differ depending on which loan/s you have. For instance, the grace period for Federal Perkins Loans is nine months, while the grace period for Direct or FFEL Stafford Loans is only six months. As for PLUS loans, there is no grace period; graduate students or parents must begin repaying these loans as soon as the loans get fully disbursed (Federal Student Aid). Before the Budget Control Act of 2011 was signed into law on August 2, 2011, students were not charged interest during the grace period for Federal Perkins loans or subsidized Stafford loans. However, starting on July 1, 2012, graduates students may no longer receive subsidized loans or the grace period that came with them. They must begin to make monthly interest payments immediately, even while they are still in school.
How Can I Avoid Defaulting on my Student Loans?
Defaulting, or failing to pay back your student loan is a major concern. In the case you default on your student loans, you can face serious consequences, including, but not limited to the following: loss of forbearance or deferment possibilities, collection costs and late fees added to the total cost of your loan, compromised credit score, lawsuit for the balance of your loan, lost eligibility for future financial aid, and more. To avoid falling into this unfortunate predicament, you should first choose a repayment plan that will work for your schedule and finances. Educate yourself about the different repayment plans available to you and choose one, not solely based on where you are now, but also on where you see yourself in the next ten or so years. You may find that the standard repayment plan, which includes fixed monthly payments, works best for you. On the contrary, if your income is consistently rising and falling, you might do better with the income-based repayment plan. It is important to note that there is some flexibility in the type of repayment plan you choose. If you find that your repayment plan does not fit your lifestyle, change it before it gets too late. By lowering your payments or making them less frequently, you can protect yourself from missing payments and eventually defaulting. In the case that you see no possible way of making your student loan repayments in the near future, you should definitely apply for deferment or forbearance. It is important that you are honest with yourself about your life circumstances because if you are not, you may find yourself in trouble with the federal government.
Is it Possible to Get my Student Loans Cancelled?
It is indeed possible to get your student loans cancelled, or forgiven, but only under certain conditions. For instance, you can forget about having to pay back up to $17,500 of your subsidized or unsubsidized loans if you are both a new borrower and will be teaching full-time at a low-income elementary or secondary school for five consecutive years. This loan forgiveness program was created to get (and keep) more teachers in historically underserved communities. For more information, you can visit the website for the Stafford Loan Forgiveness Program for Teachers.
Also, if you're working in the public service sector, your loans may be forgiven after you have made 120 payments on your Direct Loans after October 1, 2007. For your repayments to count toward the 120 payments, they must be made under specified repayment plans, however. There are some organizations within the public service sector that base loan forgiveness not on how many repayments you've made, but on how long you've worked for them. Some volunteer organizations offering partial or complete loan forgiveness include the Peace Corps, AmeriCorps, and Volunteers in Service to America. Moreover, to honor those who have served our country, there is loan forgiveness available through the Army National Guard. Having worked as a member of active duty, you can receive up to $10,000 as part of the Student Loan Repayment Program.
Another way, albeit rare, to become eligible for loan forgiveness is if your school makes a mistake, such as forging your signature on your promissory note or forgoing payment of a refund after you have withdrawn from your program. Lastly, in the unfortunate events of death, bankruptcy, or disability, your student loans will be cancelled if proof of these circumstances (certified copy of death certificate, evidence of extreme financial hardship, or physician's statement of permanent disability, respectively) is presented to the proper officials (Federal Student Aid).
What are the Pros and Cons of Consolidating Student Loans?
Some choose to consolidate their loans, which means they combine all their individual federal student loans into one mega loan. With consolidation, however, comes certain advantages and disadvantages. For one, consolidation means that you will only have to make a single monthly payment. This is much easier to manage, especially for those who may get behind on repayments simply because they have a hard time keeping track of all their student loans. Another advantage to consolidation is that it will extend the period that you have to make repayments. Having more time to pay off your student loans means that you can pay less money each time you make a repayment. On the downside, because you will take longer to repay your loans when they are consolidated than you would if they remained separate, you will end up paying more overall. Remember that little term called interest that we introduced earlier? Well, here is where it really comes into play. The longer you take to repay your loans, the more your interest will build and the more money you must pay beyond the originally borrowed amount (Federal Student Aid).
