Student Loans

    

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. 

Page Contents

  1. Student Loans at a Glance
  2. Types of Student Loans
  3. Student Loan Interest
  4. Comparing Student Loans
  5. Responsible Borrowing
  6. Minimizing Debt
  7. Cosigning
  8. Student Loan FAQ
  9. Student Loan Repayment
  10. Denial

Student loans at a glance

The average student graduates with over $37,000 in student loan debt, according to Make Lemonade. Some students graduate with much less and others with a lot more. Too often, students and parents are surprised to learn what they owe each month in student loan payments after graduation. That’s why before you borrow, you should understand your options and learn how to borrow responsibly. 

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.)

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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. 

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SOURCE: The College Board, Education Pays 2016, Figure 2.3

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Types of student loans

There are three main types of college loans. 
  • Federal
    • 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
  • State-based
    • 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
  • Private
    • 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. 

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How much will a student loan cost me?

Your goal should be to borrow at the lowest cost possible, while still allowing for manageable monthly payments. This means looking for the lowest rates and fees and balancing those with benefits of the loan and the length of the repayment term. Being a good consumer and comparing your options takes work, but the payoff can make the effort well worth the time spent.

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!

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Comparing student loans

Comparing your college loan options may seem stressful, but it is imperative that you do it to ensure you are getting the best deal for your family - and aren't filled with regret when it comes time to repay your college loans. Before you borrow, always ask the lender these questions. Write down your answers in a matrix to help you compare the loan options. We have laid out some common terms on RISLA's state-based student loans and the federal education loan programs to help you on your way: 
  • 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?
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Borrowing responsibly

What amount is the “right” amount to borrow for college?

Many students are eager to sign whatever it takes to go to their dream school. Unfortunately, they often don’t understand how much it will cost them after they graduate. Borrowing for college isn’t always bad - as long as it is done responsibly. Think about your return on investment and what will be affordable after graduation based on your chosen career track.

Only borrow what you absolutely need

You don’t need to borrow the full amount listed on your financial aid award letter. It is tempting to borrow a little extra for something you want (a new laptop comes to mind!) but don’t actually need. When you borrow money, you pay it back with interest, increasing your total costs. Only borrow what you absolutely need and no more.

How much will you earn?

Do your research on entry level salaries in your field of choice. Will you be able to afford your monthly payments with the salary you will make? Remember to account for all four years of your education when estimating your total borrowing needs. Too many students have a “borrow now, deal later” attitude that ends up getting them into trouble. A good rule of thumb is to borrow (for all years of education combined) no more than your expected starting salary after graduation and preferably less. Use our calculator to estimate how much you will be able to comfortably afford to repay

How will your education debt affect your future goals?

When deciding between two schools, you may find you want to go to one more, but it will mean you have to borrow a lot more. Think about how that will affect your ability to reach your future goals. Will you be able to afford to reach your goals with a higher student loan payment?
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Minimizing student loan debt

By now you know borrowing responsibly is key to successful student loan repayment. Here are some ways that you can potentially reduce the amount you need to borrow for college, making repayment even more affordable for you. 
  • 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. 
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Cosigning for a student loan

Why be a cosigner?

There are two major factors in play here. First, acting as a cosigner allows you to take an active role in funding the education of a loved one. It’s a noble cause, and the long-term value comes from seeing a person successfully morph from a high school graduate to a working, college-educated professional.

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?

For most borrowers, the single biggest benefit to getting a cosigner is that it increases the borrower’s chances of being approved for a student loan. With most modern students unable to pay for higher education without borrowing, cosigners open up possibilities to students who would otherwise be unable to attend college (or at least the college of their choice). The second benefit is that putting a cosigner on the loan may lead to a better interest rate if rates are based on credit score and the cosigner's score is higher than the primary borrower's score. 

In addition, a cosigner provides a substantial barrier to late payments or default. 

What are a cosigner’s responsibilities?

Cosigning will require a credit check, and may require submitting other documents, such as proof of income and/or savings, but the most important responsibilities come much later, during repayment. Just as a borrower is responsible for on-time monthly payments until the loan is satisfied, a cosigner shares that same responsibility.
  • 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!

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Student loan FAQ

What are Entrance and Exit Interviews?

Students are required to complete an entrance interview prior to receiving a federal student loan and an exit interview before graduating. Entrance interviews help you understand your federal student loan responsibilities. Exit interviews inform you about your repayment obligations and options. 

What is a grace period?

After you graduate, there may be a period during which you are not required to make student loan payments, typically for six months. All federal student loans offer a grace period but you will need to ask on your private loans. Typically, at the end of your grace period, any accrued interest on your account is added to the principal balance on your loan.

What is deferment and forbearance?

During a deferment or forbearance, you are not required to make payments on your student loans. If you are going back to school, are unemployed, in the military, or having trouble making your student loan payments for any other reason, contact your lender or student loan servicer to see if you qualify for a deferment or forbearance.

What happens if I default on my loan?

Defaulting on your student loan has serious consequences. If you are having trouble making payments, call your loan servicer to learn about your options. Avoidance is not the key! If you default on a student loan, you may:
  • 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.
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Student loan repayment

If you have a federal student loan, your loan will automatically be deferred until after you leave school or graduate. After that time, you will have a 6 month grace period before your loan enters repayment. Federal PLUS Loans for parents enter repayment right away unless you request the loan be deferred until the student graduates.
 
A Federal Direct Consolidation Loan does not come with a grace period, so keep that in mind if you decide to consolidate.
 
Private education loans may enter repayment immediately or may have deferred repayment. Be careful to understand when your first payment will be due before you borrow.
 
Once you do enter repayment on your loans, know that repayment flexibility does vary considerably between lenders and loan programs. Federal student loans offer a host of options including standard repayment, extended repayment, graduated repayment, and several income-driven repayment plans. There are also myriad deferment and forbearance options available to help students who are having difficulty meeting their monthly obligation. Federal PLUS loans have some flexibility but not to the same extent as the federal student loans. 
 
During a deferment or forbearance, you are not required to make payments on your student loans. If you are going back to school, are unemployed, in the military, or having trouble making your student loan payments for any other reason, contact your lender or student loan servicer to see if you qualify for a deferment or forbearance.
RISLA offers income-based repayment, deferment and forbearance to help borrows who are having financial difficulty, Many lenders also have deferment programs for those in school or the military. Some additional programs may be available on your loans, like rewards programs or loan forgiveness. Just ask (preferably before you borrow!) to see what you could potentially qualify for.  
 
Remember, if you are having trouble making payments on your college loans, give your lender a call and ask what they have available to help you out. Ignoring them is not the way to solve the problem. 
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Student loan denial

If you are denied on your student loan, know that all is not lost. There is no credit criteria on Federal Direct Subsidized and Unsubsidized loans (and they come with low fixed rates and very flexible repayment terms), so make sure you have exhausted the annual limits on those first. If you are denied on a Federal PLUS Loan, your student may be able to get additional Federal Direct Student Loan funds. You may also have the option of adding an "endorser" on your loan to help you qualify. 

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. 

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