What Parents Need to Know About Student Loans
April 8, 2019 | By Ana Elliot
Ah, children. Those bundles of joy that also end up being a constant worry. Whether they are bringing you beautiful parental portraits to hang on the fridge or nearly busting their teeth on table edges after you told them not to run, it’s always interesting. Let’s be real though, it doesn’t get any easier once they get older. Yeah, you might not be worried about them hurting themselves unsupervised in the kitchen by the time they're done with high school, but you do have to worry about all their expenses. None more so than the financial behemoth that is college.
That’s right! You’ve paid for soccer shoes or ballet classes for years but now there is still college. Or, perhaps your little bundle is already on their college journey and struggling financially. Whatever the case may be, college is expensive and yet, in today’s society, a necessity for most career goals. If you didn’t save up enough money to cover everything or your child didn’t get all the scholarships that were hoped for, then you and your child might be thinking of looking into student loans. Well, the world of student loans can be a bit overwhelming so here is some information to make the process a little bit easier.
What You Need to Know About Student Loans
So, parents! You are either prepping for your child to go off to school and are trying to be informed or your child is knee-deep in loans and you want to know what’s up. Well, we are here to help. There are a lot of things to keep in mind when it comes to student loans. There are multiple types of loans that come with different grace periods and repayment plans. No one student loan really covers the entire cost of a college education so your child will probably need or have multiple student loans. Because of this, you definitely need to be versed in all the different options.
Student Loan Types and Corresponding Grace Periods
- Federal Loans: Federal loans are great options and generally come with lower, fixed interest rates, flexible payment plans, and, often, credit checks and cosigners are unnecessary. Federal loans do come in many shapes and sizes though so here is a list of the different types of federal loans.
- Direct Subsidized Federal Loans: Also known as Stafford loans, these loans have accrued interest covered as long as the student (undergraduate, graduate, or professional student) is enrolled half time in courses. These loans are need-based, and the school will then let you know how much you can borrow. Loan terms are generally 10 to 25 years.
- Direct Unsubsidized Federal Loans: Like the subsidized federal loans, these loans are available to graduate and undergraduate students. These loans are not need-based or merit-based so pretty much anyone is eligible! The other difference here is with unsubsidized loans you are responsible for the accruing interest while you are enrolled and during your grace period. This accrued interest will then be added to the original loan which will make future interest even higher.
- Direct PLUS and Parent PLUS Loans: These two loans are similar in that they are some of the few that do require a credit check. The Direct PLUS loans are designed for graduate students or older students who have had time to build up their credit score. Students with bad credit can get an endorser with strong credit. Parent PLUS loans are taken out by the parent and they are required to pay while their student is in school.
- Direct Consolidation Loan: This loan is what you do when you have multiple federal loans. As I mentioned before, most loans won’t cover everything, so a lot of students accrue multiple loans. That is where a consolidation loan could be helpful. You can put all your loans into one and not have to worry about multiple monthly payments. You can also extend your repayment for 20 years which also means lower monthly payments. That sounds good but that also means more interest in the long run.
- Federal Perkins Loans: So, the first thing to know about this loan is that it is no longer available! These loans were funded by the government and were specifically for students in dire financial need. They suffered from underfunding though so students didn’t always get what they needed.
- Private Student Loans: While Federal loans provide more protections through the government, private student loans will advertise being much more customizable. They come with different interest rates, fixed rates, and different repayment plans. Cosigners with strong credit are often required. There are tons of different private loans to choose from so you’ve got options. For graduates, they even offer refinancing loans that function similarly to the Federal consolidation loans.
So, the grace period is the time after you graduate where you still aren’t required to pay for your loan. As mentioned above, some loans, even during the grace period, will still accrue interest and it is important to note that some loans don’t even have grace periods. Direct Subsidized/Unsubsidized Loans have a six-month grace period. Most student loans from the government do. Federal Perkins loans used to offer up to nine months, but this depended on the school the student got them from. Private loans are wild cards. Some of them have 6-month grace periods while others are quite short or non-existent. Because of these different lengths, it is so important that you and your student figure out how many loans they have and what kind each is. You can contact your student’s lenders to make sure you get the specific grace periods.
If your student has graduated and you want to help them get organized, you might run into the issue of them not remember all their student loans. Sadly, most freshmen and sophomores are not great at taking notes or remembering things. If you are worried that they might have let some slip through the cracks, your student can always request a free credit report which will list all their lenders. From there, contact the lenders and get the details.
Repayment Plans for Student Loans
Speaking of planning! Let’s talking about repayment plans! Repayment plans are something your student was probably told about when they applied for their loan but, like the details of all their loans, they might not have paid a lot of attention to it. There are quite a few different repayment plans for student loans and most lenders will ask them to choose one when they apply. If they don’t pick a specific one, the lender often defaults the loan to the standard ten-year repayment plan. Repayment plans vary in length and interest. While a lot of people chose longer repayment plans due to the smaller monthly payments, don’t be fooled: This means your student will be paying way more over the life of the loan due to the interest. If your student made some misguided choices in their repayment plan, not to worry! These can be changed at any time! Here are the basic repayment plans:
- Standard Repayment Plan: This plan comes locked and loaded with a standard monthly payment based on how much was borrowed and the repayment length. The minimum starts at $50 but goes up from there. There are up to 10 years to pay it back, but this can be shortened. This is one of the quicker payment plans but, because the monthly payment is fixed, it could hurt your student’s monthly budget if they aren’t making enough money during certain periods. In general, it is not a good idea for the monthly payments to be over 10% of their monthly income. These plans do allow for prepayment though!
- Graduated Payment Plan: This repayment plan is great for people getting out of college and making a starting salary in their field of study. Most post-grads aren’t making a lot now but plan to be making more in the future. These payments start out low then, over time (generally, every two years), get higher. These plans also have a maximum of a ten year period.
- Extended Repayment Plan: This bad boy is out there for people who have a lot of student loan debt and don’t mind paying for it for a long time. This plan is over 25 years with a lower monthly payment. As I mentioned before, the longer the payment plan, the more interest will be paid in the long run. Also, this plan is only for those who owe more than $30k in either private loans through the federally insured Federal Family Education Loan (FFEL) program or through the Direct Loan program. Also, different types of loans (either the private loans or the Direct Loan programs) cannot be combined to reach $30k.
- Income-contingent Repayment Plan: This plan can be applied to federal Direct Loans or Graduate or professional school borrowers. This plan is perfect for people who never have a solid cash flow. This plan sets a monthly payment based on how much your student is making a month. The payments will rise or fall to match their salary. Paying this way can take a long time (max 25 years) and if they still have unpaid debt, it can be discharged at the end of the loan term.
- Income-based Repayment Plan: So, this plan is similar to the above in that it sets the monthly payments around the student’s income but also includes family size (ie: if your student has their own family). It also includes limits on what they have to pay annually. This repayment plan also has balance cancel if they reach the end of the loan term (again, max 25 years). If your student is planning to work a “public service job,” they can also apply to have their loan forgiven.
Being an Informed Parent on Student Loans
So this might all feel like a lot of information to get dumped on you all at once. We get it. It is a lot. BUT! You have made a brilliant decision to get an education. This means you can help your student as they take out their loans or help them deal with them after they graduate. Just because they go off to college doesn’t mean that you can’t be involved or offer a helping hand! Be informed and maybe send this to them! They probably don’t even know this much! If you’d like to read more about mistakes to avoid with the repayment of student loan debt, read this article from eadvisors.com!