Consider how different loan options can impact your financial future
Money shouldn’t keep you from pursuing higher education. It’s always best to pay for college without borrowing money, but for over half of American students, that’s just not possible. Student loans are an important avenue to consider when figuring out how to pay for college. Understanding the differences between the kinds of loans you’ll be offered can impact your wallet for years and even decades to come.
Nearly 45 million Americans have student loan debt, with the average amount owed totaling over $30,000. Over 46% of students at public four-year colleges take out student loans to pay for school, and that number jumps to 88% for private colleges. So you’re not alone if student loans are in your future.
How do student loans work?
A student loan is money that qualified students can borrow to help pay for their education. To qualify for your best loan options, students need to fill out the FAFSA, the Free Application for Federal Student Aid. Money is distributed for each semester of college, and you are allowed to spend it on school-related expenses. Loans have an interest rate that determines the cost of borrowing the money. Lower interest rates are far better for your wallet, and can have lasting impacts on your financial future. After finishing school, you start to repay your loan plus the interest rate you signed up for. Interest rates matter! For example, $30,000 repaid over 10 years at a 3.76% interest rate will cost you a total of $6,039 in interest spread over 120 months. However, borrowing the same amount at a 6.31% interest rate will cost you $10,530 in interest over the same repayment period! Clearly it pays off to shop around for the best rate. Next, we’ll take a look at your options.
Federal versus private loans
There are two common loan options for students: federal loans and private loans. Federal loans are issued by the United States Department of Education at competitive interest rates with no surprises. They are available to just about everyone, but not all are equally generous. Private loans are issued by banks and other private institutions with typically higher interest rates and less flexible repayment options.
Private loans don’t come with the option of public service loan forgiveness or easily accessible delayed payments in times of financial difficulty. During the COVID-19 crisis, borrows of federal student loans were able to put a pause on monthly payments for most of 2020, while private loan borrowers had to keep paying. With federal loans it’s possible to apply for deferment or forbearance. These are two similar ways of putting repayment on hold. Deferment pauses payment without the accumulation of interest, while in forbearance the loan continues to accumulate interest. Congress has almost no control over private loans, but they have a lot of power over the management of federally-backed loans. This means that with federal loans, there’s even the possibility of partial loan forgiveness through public service employment or other government-sponsored forgiveness.
Federal loan options
There are notable differences between the types of federal loans:
- Subsidized direct loans don’t accumulate interest until after you graduate. This can potentially save you thousands of dollars in the long-run. You aren’t even expected to begin repayment until six months after graduation. In times of financial difficulty, forbearance and deferment are available upon request. This is generally the best loan option.
- Unsubsidized direct loans are similar but begin accumulating interest immediately. Once your allowance for subsidized loans has been exhausted, this is your next best option. Forbearance is possible, but deferment is not available for this type of loan.
- PLUS loans are a last resort for students who have borrowed the maximum amount from the subsidized and unsubsidized loan programs. PLUS loans are taken out by a parent to fill in the gaps when other sources of financial aid are not enough. However, their interest rates are typically higher, sometimes double that of direct loans. Interest is never deferred, even in forbearance.
Money shouldn’t be a barrier between you and your dream career. With the right guidance and preparation, you’ll be confidently stepping foot on a college campus in no time. The college admissions process is complicated, and it’s easy to get overwhelmed long before you even choose your preferred colleges. At Hawk Educational Solutions, we offer customized college admissions counseling that will not only help find the best college fit for you, but help you present a compelling, high-quality college application. For more information, call us at (619) 300-7231.