The Season of College Loans

This is the college loan season.

The new federal college loan season started on July 1, which marked the first day families could apply for a federal loan for the 2016-­2017 school year.
 
When it comes to paying for college, we believe it's imperative to minimize the amount of debt, if any at all, that your student incurs for college. After all, it is the largest expense most parents and students will ever face and how you pay for college can have massive, enduring consequences. 

However, as a practical matter, Americans are taking out student loans at unprecedented rates and you need to be informed. So long as the debt is planned for and manageable, loans can be an effective and practical way to bridge the college funding gap.

If any portion of your child's college education is likely to be paid through loans, this months newsletter will help you better understand college loan programs, as well as smart ways to repay the debt.

THE BEST COLLEGE LOAN

The first loan that most families should consider is the federal Direct Loan. Only students (both undergrads and graduate students) can borrow through this program.
 
There are limits to what students can borrow. Here are the yearly loan limits for most undergrads:
 
Freshmen: $5,500 Sophomores: $6,500 Juniors: $7,500 Seniors: $7,500
 
For students who don’t graduate in four years (and most students don’t), the maximum amount an undergrad can borrow is $31,000.

Two Direct Loan Versions

Within this student loan are two different versions — the Subsidized and Unsubsidized Direct Loans.
 
The superior loan is the subsidized one. Students who qualify for the subsidized loan don’t have to pay the interest that accrues while they are enrolled in college, during the six­-month grace period when they leave school or graduate and during deferments. The federal government pays this interest.
 
In contrast, borrowers with the unsubsidized loan are responsible for covering the interest at all times.

Where the Loans Appear

​A college’s financial aid award will alert a family on whether a student qualifies for the subsidized loan. The aid letter will show the breakdown between subsidized versus unsubsidized loans.
 
A federal formula is used to determine if a student, based on a family’s finances, is eligible for the better-subsidized deal. The majority of subsidized federal loans are awarded to students whose family’s adjusted gross income is less than $50,000.
 
In the example below from a college in Florida, you can see both types of Direct Loans offered in the financial aid package. A family can accept or reject one or both of these loans.

For the 2016-­2017 school year, the interest rate on both types of Direct Loans is 3.76%. The interest rates are adjusted annually and linked to the 10­-year U.S. Treasury note.
​
When Borrowing Limits are Higher

Students can borrow more through the Direct Loan program if their parents are turned down for the federal PLUS Loan.
 
Here are the maximum Direct Loan amounts for students whose parents are unable to obtain a PLUS Loan.
 
Freshmen: $9,500 (no more than $3,500 in subsidized loan.) Sophomores: $10,500 (no more than $4,500 in subsidized loan.) Juniors: $12,500 (no more than $5,500 in subsidized loan.) Senior: $12,500 (no more than $5,500 in subsidized loan.)
 
Maximum undergraduate borrowing when the PLUS Loan is not an option is $57,500.

PARENT PLUS LOAN

The PLUS Loan was originally launched in 1980 to primarily help middle and upper­-middle class families send their children to expensive private colleges. That original mission greatly expanded over the years.
 
The federal loan for parents isn’t nearly as attractive as the Direct Loan. The interest rate for the PLUS Loan for the 2016­-2017 school year is 6.31%. And even worse, the federal government assesses a hefty 4.3% fee for all money borrowed.
 
The PLUS Loan is designed to allow parents to cover the costs that aren’t taken care of by the child’s financial aid package. The maximum amount that a parent can borrow will depend on the school’s cost of attendance minus the grants and federal student loans that the child receives. 

PLUS Loan example:
Cost of attendance: $60,000
Direct Loan: $5,500
School grant: $20,000
 
After the Direct Loan and school grant is subtracted from the cost of attendance, the child’s remaining financial need would be $34,500. A parent could borrow up to this amount ​

A CHANGE WITH PRIVATE LOANS

For parents with very good credit histories, a private loan can be an attractive option.
 
While all borrowers receive the same interest rate for federal loans, the interest rate will vary with private loans.
 
The interest rates on private college loans can be lower than the PLUS Loan for attractive borrowers, but these loans don’t provide the borrower protections that federal loans do.
 
Traditionally private college loans have been designed for students, who almost always need an adult cosigner. In a new development, however, some lenders have rolled out private college loans for parents.
 
Here are lenders that are now offering these new private parent loans:

• Citizens Bank
• Citizens One
• Sallie Mae
• SoFi
• Wells Fargo

An easy way to check rates for private loans is to head to a multi­lender platform such as Credible (https://www.credible.com) or LendEDU (https://lendedu.com).

Question: When does a graduate have to begin repaying their student loans and what is the process?

Answer: After leaving or graduating from college, borrowers have six months to begin repaying their federal student loans. Their first step would be to identify their outstanding loans.

Borrowers can access all their federal loans by logging into the National Student Loan Data System.

It could be trickier locating any private loans that a former student has since a centralized database doesn't exist. Most private student loans should show up on the borrower's credit history, so one solution is for the borrower to obtain a free copy of his or her credit report from annualcreditreport.com.
 
Borrowers can also contact their college for this information.

Here are two new online resources that are both linked to college loans.

Private Student Loans Guru

Private Student Loans Guru is a must for anyone wanting to learn more about private student loans. Mark Kantrowitz, a nationally recognized financial aid expert and the technical editor for SCP, recently launched this website.
 
The website (http://www.privatestudentloans.guru) includes easy­-to-­access background on private loans and includes such topics as:

• Private parent loans
• Private consolidation loans
• Student loan discounts
• Cosigner releases
• In­school payment options
• How to save money on student loans

The website also includes the names of lenders in the private loan and refinancing niches.

Fidelity Labs Student Debt Tool

Last week, Fidelity rolled out the Fidelity Labs Student Debt Tool. Anyone can use this free tool that was designed to help borrowers best manage their student debt and evaluate their repayment options, which can be confusing.
 
Fidelity created this tool (http://new.fidelitylabs.com/student­loans/#/) and is working on adding to this offering because of its concern with the high level of college debt in this country. A recent survey showed that one out of three people in Fidelity workplace retirement plans carry student loan debt.

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The opinions voiced in this ​material are for general information only and are not intended to provide specific advice or recommendations for any individual.