If you or your child are heading to college in the next few years, you are probably no stranger to the term "student loans." In this guide, we'll cover the basics of college loans - whether they are in the student name or parent name - and discuss types, terminology, repayment, and how to compare your options and borrow responsibly.
- Student Loans at a Glance
- Types of Student Loans
- Student Loan Interest
- Comparing Student Loans
- Responsible Borrowing
- Minimizing Debt
- Student Loan FAQ
- Student Loan Repayment
Despite the doom-and-gloom news you hear about student loans in the media, student loan payments are for the most part manageable for graduates. Students who graduate with enormous amounts of debt are in the minority. Below, you can see the distribution of borrowers and debt by outstanding balance for 2017 (Source: The College Board, Trends in Student Aid 2017, Figure 8.)
5% of borrowers have an outstanding balance of $100,000 or more. If you dig deeper, you'd find many of these borrowers attended professional programs such as law school or medical school, giving them degrees to earn the salaries necessary to make larger student loan payments and get a good return on investment. Meanwhile, 36% of borrowers have an outstanding balance of less than $10,000. Another 21% have between $10,000 and $20,000 in outstanding debt.
Studies continue to show that student loans pay off when they allow you to earn a college degree. The average college graduate starts to break even on their investment in college around age 31, assuming they attained a 4 year degree, according to the College Board (SOURCE: The College Board, Education Pays 2016, Figure 2.2B) And college graduates earn much more than their peers who didn't attend college, as you can see below.
SOURCE: The College Board, Education Pays 2016, Figure 2.3
- Loans made under the US Department of Education to students and parents
- Awarded through each school's financial aid office after completing the FAFSA each year
- Combination of loans based on financial need and those not based on need
- Made through state-based non-profit lenders
- Usually offer competitive rates and terms, some lower than federal loan rates
- Usually require that you are a resident of or go to school in the sponsoring state
- You must apply on your own through the lender
- Terms and rates vary widely based on the lender and program
- You must apply on your own through the lender
Loans may be made in the student's name or the parent's name on the student's behalf. In the case of state-based and private loans, students will most likely be required to have a cosigner or they will pay a much higher rate.
During your research, keep in mind shorter repayment terms typically mean you will pay less interest than if you had chosen a longer repayment (assuming the rates are equivalent). As an added bonus, shorter repayment terms in the private loan market often have lower interest rates, compounding your savings. Keep in mind that although your monthly payments may be higher with a shorter term, you’ll save more money in the long run and pay-off years earlier, freeing up cash for other things.
Does interest rate really matter? You may think it is immaterial, but look at how much of a difference interest rate can really make!
Comparing student loans
- What is the interest rate?
- Is the interest rate fixed or variable? (Variable rates can change monthly or annually until your loan is paid off, which means your payment can also change.)
- Is the rate I receive based on my credit?
- Does the interest rate ever change? (Some loans have different rates while you are in school vs. after you graduate.)
- What are the fees?
- What is the loan term?
- What would my monthly payment be if I borrowed $X,XXX?
- When would my first payment be due?
- How are loan funds disbursed? (to you or the school?)
- What steps do I need to take to complete an application?
- How long does it take to process an application?
- Are there loan limits? Annual? Aggregate?
- Who is eligible for this loan?
- Do I need a cosigner?
- What deferment and forbearance options are available to me?
What amount is the “right” amount to borrow for college?
Only borrow what you absolutely need
How much will you earn?
How will your education debt affect your future goals?
- Take advantage of free community college in RI. The RI Promise program provides free tuition for your first two years, and then you can transfer to URI or RIC, taking your college credit with you.
- Even if you don't live in RI, community college is a great option for your first two years. The price tag is considerably less than state flagship schools or private schools.
- Earn college credit in high school. If your school offers one, take advantage of a dual enrollment program, which allows you to earn college credit while you are still finishing up your high school diploma.
- Take Advanced Placement classes, and follow up with the exam. Many schools will provide credit if you earn a certain score on these exams.
- Conduct a thorough scholarship search. Scholarships are not just for straight-A students and exceptional athletes. Many are awarded for personal traits, interests, and other talents. Many scholarships are also awarded based on financial need. Local scholarships, although they tend to be smaller in amounts, can help you afford books and everyday living expenses. Start your scholarship search at www.rischolarships.org.
- Enroll in a school where you can obtain merit-based financial aid. If your SAT scores, GPA and class rank far surpass those of the typical admitted student, you may be a candidate for merit-based aid. Contact the college admissions office for criteria. If you are able to get this kind of aid, it could greatly impact the amount you need to borrow for the school.
Why be a cosigner?
The second factor is more practical, but no less important. Most high school grads and college students simply don’t have an established credit history. They haven’t had time to build a successful repayment history with various lenders like credit card companies or mortgage lenders. As a result, they’re unable to borrow alone. Most lenders will require that a second person – a person with an established credit history – to cosign on the loan.
What are the benefits?
In addition, a cosigner provides a substantial barrier to late payments or default.
What are a cosigner’s responsibilities?
- Student loan debt is a long-term commitment, with repayment periods that can extend for many years. Throughout the course of that repayment, the cosigner will be responsible for repayment just as the borrower is. That means that if the borrower fails to meet the terms of repayment and the cosigner doesn't do their part to chip in, both parties will be penalized.
- Some loans will allow the borrower to release the cosigner after certain conditions have been met. Make sure to ask your lender about this option, if it is available, and be very careful to follow the guidelines.
- Student loans cannot be discharged through bankruptcy. It’s important to ask your lender about other contingencies as well, so that you can be clear on the terms of your loan. What happens if the borrower becomes ill or is unable to work? Will the loan be discharged if the borrower dies? How long will it take to alert the cosigner that there is a problem if the borrower misses a payment or is in danger of default?
Knowing your responsibilities as a cosigner is an important first step towards helping your loved one cover the cost of school. Armed with the right info, you can feel confident that you’re helping to make a difference, and that you’re making the commitment with a clear understanding of what it entails!
What are Entrance and Exit Interviews?
What is a grace period?
What is deferment and forbearance?
What happens if I default on my loan?
- Be ineligible for federal & private student aid in the future.
- Lose your deferment and forbearance options.
- Have to pay your entire loan balance immediately.
- Pay additional costs if your account is turned over to a collection agency or attorneys.
- Hurt your credit and therefore your ability to borrow in the future, rent an apartment, or even get a job.
- Have your federal or state tax refund withheld so that it can be applied to your defaulted loan balance.
- Have your wages garnished.
If you are denied on a private or state-based student loan, call the lender and ask why. It may be something as simple as an address mismatch or you entered the wrong social security number or had a typo in on your income. A quick phone call may solve your problem. However, if the issue is your credit score, financial history, or some other factor, there may be some steps you can take. Below, we have included a blog on common reasons for student loan denial and how to handle them.