An education beyond high school is an investment in your future. It can be expensive and often requires you or your family to take out loans to help pay for it. If you’re considering student loans to help you pay for school, you’re not alone – many students need loans to cover their full cost of attendance. In 2010, 67% of bachelor's degree recipients used loans to pay for their education. But the more money you borrow now, the higher your monthly loan payments will be after graduation.
If you have to take out student loans, comparing your options can help you find the student loan best suited for your needs.
Student loans fall into two categories, federal loans and private loans.
- Federal loans, which are subject to oversight and regulation by the federal government, include:
- Direct Loans, where the U.S. Department of Education is the lender;
- Federal Family Education Loans (FFEL), where private lenders make loans backed by the federal government; and
- Federal Perkins Loans.
- Private loans, sometimes referenced as “alternative loans,” are offered by private lenders and do not include the benefits and protections available with federal loans.
For most borrowers, federal student loans are the best option. When you start to pay back your federal loans, the interest rate will be fixed, which will help you predict your payments after graduation. And in some cases, the federal government will pay the interest on your loans while you are in school – these loans are called subsidized loans.
Other student loans are generally private student loans. The most common private student loans are offered by financial institutions. Their interest rates are often variable, which means your interest rates and payments could go up over time. Private loans can also be more expensive – rates have been as high as 16% over the past couple of years. And when it is time to repay, private loans don’t offer as many options to reduce or postpone payments.
For most people, federal student loans are a better deal than private student loans, so you’ll want to take advantage of federal options first.
If your grants and federal loans are not enough to cover the cost of your education, you should consider the following options:
- Search for scholarships. Look for state and local grants and scholarships using one of the many free scholarship search options available. Servicemembers, veterans, and their families may be eligible for GI Bill benefits and/or military tuition assistance.
- Cut costs. Consider getting one or more roommates or a part-time job, possibly through Federal Work-Study.
- See what your family can contribute. Your parents may be able to get tax credits for their contributions. Parents can also explore the federal Direct PLUS Loan program.
- Shop around for a private loan. Remember these loans generally have higher interest rates and less repayment flexibility compared to federal student loans. You generally should turn to private loans only after you have explored all other grant, scholarship, and federal loan options. If you can show you have a very high credit rating, you may find an affordable private student loan, though you will likely need a co-signer, who will be legally obligated to repay the loan if you can’t or don’t. Look for the one with the lowest interest rate and flexible repayment options.
First, make sure you need a private student loan. These loans generally are not as affordable as federal student loans and offer little repayment flexibility.
Here are some factors to consider:
- Talk to your school’s financial aid office to get a form certifying that you need additional aid to cover the cost of attendance – most lenders require it.
- Shop for lower interest rates and loans that offer flexibility if you have trouble making payments.
- Some private lenders may advertise very low interest rates – remember, only borrowers with the best credit will qualify for these rates. Your rate could be much higher.
- In 2011, over 90% of private student loans required a co-signer, so make sure you have someone like a parent or another relative lined up. Your co-signer will be legally obligated to repay the loan if you can’t or don’t. You may want to consider loans that offer “co-signer release” after a number of on-time payments.
Private companies may offer you loans and other forms of financial assistance for your education. They often use direct mail marketing, telemarketing, television, radio, and online advertising to promote their products.
Paying for your education is a serious long-term financial obligation; that’s why comparing the costs of different ways of financing your education is so important. Private loans tend to have higher fees and interest rates than federal government loans. Private loans also do not offer the opportunities for cancellation or loan forgiveness that are available on many federal loan programs. So it makes good financial sense to exhaust your federal loan options (as well as grants and scholarships) before considering loans from any private companies. To learn more about federal government loans, visit www.FederalStudentAid.ed.gov .
How to Spot Deceptive Private Student Loan Practices
If you are considering a private student loan, it’s important to know whom you’re doing business with and the terms of the loan. The Federal Trade Commission (FTC) and U.S. Department of Education (ED) offer these tips to help you recognize deceptive private student loan practices.
- Some private lenders and their marketers use names, seals, logos, or other representations similar to those of government agencies to create the false or misleading impression that they are part of or affiliated with the federal government and its student loan programs. ED does not send advertisements or mailers, or otherwise solicit consumers to borrow money. If you receive a student loan solicitation, it is not from ED.
- Don’t let promotions or incentives like gift cards, credit cards, and sweepstakes prizes divert you from assessing whether the key terms of the loan are reasonable.
- Don’t give out personal information on the phone, through the mail, or over the Internet unless you know with whom you are dealing. Private student lenders typically ask for your student account number — often your Social Security number (SSN) or Personal Identification Number (PIN) — saying they need it to help determine your eligibility. However, because scam artists who purport to be private student lenders can misuse this information, it is critical to provide it or other personal information only if you have confidence in the private student lender with whom you are dealing.
- Check out the track record of particular private student lenders with your state Attorney General (www.naag.org), your local consumer protection agency (www.consumeraction.gov), and the Better Business Bureau (www.bbb.org).
Special Considerations for Consolidation of Federal Loans
Student loan consolidation is combining several loans into one with a new repayment term and interest rate. This is generally offered in connection with federal loans. Here’s how to help identify potential problems related to loan consolidation:
- Avoid lenders and marketers who use high-pressure sales tactics. Some marketers pitch that “your interest rates may go up if you do not consolidate immediately!” Whether and when interest rates for consolidating your loans will change depends on what type of loans you have.
- Look at your loan documents to determine whether the interest rates are fixed or variable:
- If all of your education loans have fixed interest rates, there may be no deadline to consolidate.
- If some or all of your loans have variable interest rates, when you consolidate into a fixed loan it may affect the interest rate of your loan. ED publishes new variable rates for some federal loans each July 1st. The annual rate changes can raise or lower the interest rate offered on a consolidated loan because the consolidation interest rate will be the weighted average of all loans consolidated.
Whether or not you have a targeted timeframe, take your time to determine whether consolidating is right for you.
- Some lenders impose restrictions on promised discounts. Some may disclose these limits only in the fine print. Read the fine print in your loan documents to find these types of conditions:
- Some lenders lower the interest rate on your consolidated loan, but only if you opt for automated payments from your checking account.
- Other lenders discount the interest rate on your consolidated loan, but only if your loan has at least a specified minimum loan balance.
- Still others agree to lower the interest rate on your consolidated loan, but only if you remain current on your payments for the life of the loan. You may want to consider loans with more immediate discounts, a shorter on-time payment period for interest rate discounts, or an additional discount for signing up for automatic payments.
- Some lenders sell consolidated loans to other companies. Because benefits of consolidated loans — like promised discounts — may not transfer, you may lose benefits if the lender sells your loan. Ask the lender whether the terms of your loan will change if it is sold.
- Be cautious about consolidating federal loans and private loans into one private loan. The result of consolidating all loans into one non-federal private loan means that you lose all the benefits and protections provided in the federal loan programs.
- Consolidating a Perkins loan may not be in your best interest. You may lose unique deferment and cancellation rights available to Perkins loan borrowers. For more information about these rights visit www.myeddebt.com/borrower.
- Frequent consolidation after borrowing may impact timelines you need to meet to qualify for these benefits.
For More Information or to File a Complaint
To learn about federal student loans, contact:
U.S. Department of Education
Federal Student Aid Information Center
P.O. Box 84
Washington, DC 20044-0084
800-4-FED-AID (TTY: 800-730-8913)
Federal Student Aid, an office of the U.S. Department of Education, administers the federal student financial aid — grants, loans, and work-study programs — available for education beyond high school. Federal Student Aid interacts with postsecondary schools, financial institutions and other participants in the student aid programs to deliver services that help students and families plan and pay for college.
Notify the Federal Student Aid Ombudsman at 1-877-557-2575 or www.ombudsman.ed.gov if you have a complaint that you cannot resolve with your lender.
Consumer Financial Protection Bureau’s Choose a Student Loan and Action Guide
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Understanding Student Loans
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Undestanding Student Loans in Real Terms
We have all heard the statistics: Tuition keeps rising, while student debt continues to increase. In fact, the United States now has more total student loan debt than credit card debt. The good news? Borrowers are eager to provide students with loans to make their college aspirations a reality. The bad news? Those same students will graduate with thousands in loan payments. Unfortunately, students often do not recognize the full impact of taking on additional debt. Let's get nerdy and put an average debt loan in terms anyone can undrestand.
Average Student Debt
Let's start with some background on student debt.
The average credit card debt in the U.S. is: $15,956. The average student debt in 2010 was $25,250, with public schools at $22,420 and private non-profit schools at $30,690.
Students Accumulating Debt
2/3 of all students graduate with student loan debt.
Federal loans: 3.4% Stafford Subsidized, 5% Perkins and %6.8 Stafford Unsubsidized.
Private Loans: 3.4% to 13.5%, at 9.5% Average
Note: Variable Interest Rate private loans can vary from 3-17%
So how much will your payments be? Out of $25,250, $19,695 is to private loans, and $5,555 is to Federal loans. This is the mix of Federal/Private loans with conservative 5.1% Effective Interest Rate.
In 10 years at 5.1% interest rate, it will cost $282 monthly, with a total interest paid of $8,559.
In 20 years at 5.1% interest rate, it will cost $183 monthly, with a total interest paid of $18,634.
How much is $183/month, really? You can lease a brand new car every three years. You can buy a new iPod every month for 20 years (that's a todal of 240 iPods). You can buy one iPod and 38K songs - 106 days of music (that's rougly 152,640 minutes - that's right, non-stop). You can be invested in a 401K, and worth over $100,000 after 20 years. You can buy a tropical island (Yes, really. $30,000 will get you a ncie spread even Robinson Crusoe would admire). You can skydive twice a week for 20 years (that's over 2000 jumps).
But don't avoid college just because of debt. The average college graduate with a bachelor's degree is expcted to earn $1.2 million more over the course of their lifetime than those with just a high school diploma.
The average Bachelor's Degree Salary is $51,171, with $33,000 take-home pay (approx.), with 8.8% student loan payment and 30% taxes (approx.). $3,100 of your gross annual salary will be needed to cover $2,000 in loan payments (after taxes).
Student Debt is not all bad, but it's important to be aware of your future obligations and understand that responsible planning now can save you a lot of money later.