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Regardless of what you’re planning to study, college is the most exciting time in a young person’s life. But whether you’re looking forward to rush week or the science lab, your first order of business in the college application process should be to compare student loans. Once you’ve exhausted financial aid and grant opportunities, then it’s time to look into the best student loan options to meet your needs.
Here’s a look at some alternatives to keep in mind:
Federal Loans: When you begin to compare student loans, federal loans will most likely be your first stop. Administered by the US Department of Education, these loans are divided into Stafford Loans (for students) and Plus loans (for Parents).
Private Student Loans: Private education loans are often a good option when a student has already tapped into their federal loan and grant opportunities, and still need to bridge the gap to the final cost of their schooling. As you compare student loans, don’t dismiss private loans until you’re completely sure you won’t need them.
Graduate Loans: Graduate and professional students can now borrow under the PLUS loan program. If you are working on furthering your education, this may be the best student loan for your personal needs.
It is important not to build up any unnecessary debt while in college, as this can only complicate things once it is time to start repaying your loans. However, this does not mean it is a bad idea to start building credit. You can actually use your college loans to help you build this credit, making it easier to refinance them at a lower interest later.
Many student credit cards have higher interest rates then you might like. If you use a credit card wisely it will not be a problem. A good way to keep tabs on your student loans while in school and build credit at the same time is to use a credit card to send payments to your loan provider.
Even if it is just a small payment to cover some of the interest accruing on your federal unsubsidized loans, this still helps. Make a $50 payment to your lender with your new student credit card. Wait a week or two, and then before any interest builds up on your card, pay off the $50. Bit by bit, you are reducing the amount you must pay back after you graduate and building a strong base for a good credit score.
Never use the card to make a loan payment larger than you are able to pay off in the same billing cycle. Also, to avoid temptation or the chance of using the card on a whim, don't carry it with you. Leave it in a safe place in your room and only use it to make these unsubsidized loan payments. This way you are less likely to build unnecessary debt.
Most people will agree that subsidized Stafford Loans are preferred over unsubsidized. Generally speaking, you will tend to finish college with less student loan debt because the U.S. Department of Education covers the interest while you are not in repayment.
There are, however, limits placed on these loans. The best way to get through financing your college career will be to maximize the amount of subsidized student loans you take out. Once you have done this, supplement those funds with unsubsidized student loans to cover remaining costs of attendance.
The total amount in subsidized Stafford Loans that a dependent first-year student may receive is $3,500. That amount increases to $4,500 the following year, and remains at $5,500 for each year beyond that. The maximum amount allowed over the course of a college career is $23,000.
At most schools this doesn't even cover one year. Enter the unsubsidized loans.
For an independent student, the annual Stafford limits are roughly double the dependent figures. However, the amount that can be subsidized is equal to that of dependent students. In the end, an independent student may receive up to $46,000 in Federal Stafford Loans, though only $23,000 of that may be subsidized.
The simple fact is that neither will cover all of the expenses at most schools today, and must be in used in combination with each other and other forms of aid. It is in how you combine them that will either save or cost you more money. Take advantage of as much in subsidized college loans as you can to reduce your debt.
You can save money by maximizing the amount of subsidized student loans you take out before turning to unsubsidized loans. This doesn't mean, however, that you cannot still save money on the unsubsidized loans you have borrowed.
The interest that accrues on the loan while you are in school can be used in your favor. If you make payments every month to cover the interest as it builds, that money can be used as a deduction when filing your tax return at the end of the year.
Once you enter repayment on your subsidized student loans you can claim the interest on them as a tax deduction too. Obviously, the less interest you are responsible for the better. That is why subsidized loans are preferable.
By making interest payments on both types of loans and claiming them on your taxes, it lessens the burden that interest rates can place on you. So whether you have subsidized, unsubsidized student loans or both, there are ways to save a little money and make getting out of debt easier.
There are many frequently asked questions when it comes to applying for student loans. There is a lot of ground to cover on the subject of education expenses and there are many confusing areas that can trip people up. One of those areas being subsidized and unsubsidized loans.
So to answer the question that so many people ask, here it is. There is no such thing as a subsidized private student loan. All lenders of private student loans place the responsibility for interest accumulated on the account on the shoulders of the borrower. Just like a federal unsubsidized student loan, private student loans begin accruing interest upon the first disbursement.
There is only one loan available today that is privately funded and can be subsidized. This is the Stafford Loan through the Federal Family Education Loan Program (FFELP). The reason why this loan can be subsidized is because, while the money is from a private source, the loan itself is federally guaranteed by the U.S. Department of Education.
So when you apply for financial aid, make sure to load up on the subsidized loans. Because every other kind of loan will start building interest sooner and place that responsibility on you.
There are special considerations that must be taken into account when consolidating federal student loans. Specifically, they have to do with subsidized and unsubsidized loans.
You know that federal loans generally have lower interest rates than private ones. Federal interest rates are also capped, whereas private loans are not. What you need to determine before choosing a consolidation plan is if it is even in your best interests to refinance your federal financial aid.
Unsubsidized student loans usually carry with them a higher interest rate than subsidized loans. Consolidating the two together is only beneficial if it will lower your interest overall. Depending on the rate you can consolidate at, you might be better off keeping the two types of loans separate.
If you have trouble keeping them separate and making both monthly payments, there are alternative payment plans that will reduce your monthly bills. Use an online consolidation calculator to see what your best option is. You want to make sure that your subsidized student loans and unsubsidized both work in your favor. Sometimes that means keeping them separate.
On July 1, 2000, federal legislation mandated strict rules for students with drug convictions receiving financial aid from the government. The number and nature of drug convictions a student has may result in long-term suspension of eligibility for federal aid.
Eligibility for both subsidized and unsubsidized student loans, like the Federal Stafford Loan, is suspended for one year on a first-time offense for possession of illegal drugs. The suspension begins on the date of conviction. A second conviction carries a suspension of two years, while a third suspends eligibility indefinitely.
Convictions for the sale of illegal drugs carry stiffer penalties. The first offense makes the student ineligible for two years and the second offense brings with it an indefinite suspension.
This does not apply to convictions that have been overturned, expunged or took place before the age of 18. Even if you have been convicted of one of these offenses, you should still fill out the Free Application for Federal Student Aid (FAFSA), since many schools and other organizations use information on this form to determine privately funded aid.
You may always regain eligibility after an indefinite suspension if you complete a federally approved rehabilitation program. This will allow you to reapply for unsubsidized and subsidized student loans.
Unfortunately, it is not possible to finance your college education solely on subsidized student loans. By the time you graduate you will most likely have far more to pay back in the form of unsubsidized student loans.
This means that you will be paying back a fair amount of interest on these accounts in addition to the principal amount. The best way to avoid massive amount of interest on your federal financial aid is to make payments on the interest while you are still in school.
There is no fee for early repayment. If you can send in small payments each month that cover whatever amount of interest has accrued it will lessen the burden later on. Do this through both your time in school and your grace period following graduation, and by the time your repayment period begins you are starting with the principal loan amount.
This will shorten your repayment period and the amount of interest that will add to your student loan debt. You don't have to make a payment every month while in school. If you are short on money one month you won't be penalized for not sending a check in. However, when you can afford to send a payment in on the interest, you will find that it pays dividends for you in the future.
Defaulting on your federal student loans makes the full amount of the loan due immediately. Most people are not able to pay this right away. So what should you do? There is a way to repair your situation. It is called loan rehabilitation.
By rehabilitating your federally subsidized and unsubsidized student loans, they will no longer be classified as in default, the negative status reported to credit bureaus by the lender will be deleted, and you will again be eligible for benefits like deferment.
In order to rehabilitate your subsidized and unsubsidized federal loans, you must make nine payments of a specified amount, within 20 days of the monthly due date, for 10 consecutive months. Once this has been done, Direct Loans will be returned to the Direct Loan Servicing Center. Loans made through the Federal Family Education Loan Program (FFELP) can be purchased by an eligible loan company. A regular repayment schedule will resume.
You will then be able to apply for further financial assistance from the Federal Government. You should check to see what you are still able to borrow in unsubsidized and subsidized student loans like the Stafford Loan, however, since there are set limits on these.
|Jennifer Mathes, Ph.D.|