Beautifully Frugal: Understanding Student Loans
As college tuition rates continue to rise, applying for student loans has become the norm for those seeking higher education. Those who know me know I have a strong dislike for student loans; however, I recognize they are the only option for some if they want to further their education. While these loans can open doors to greater opportunities, determining which loans work best for you can seem overwhelming. In this month's Beautifully Frugal, we'll dive into the different types of student loans, tips for managing them, and discuss effective repayment strategies.
Types of Student Loans
Federal Student Loans: Federal loans are typically the best option for students. They come with benefits like fixed interest rates, flexible repayment plans, and potential loan forgiveness programs. The main types include:
Direct Subsidized Loans: These loans are designed for undergraduate students who demonstrate financial need. To qualify, students must meet basic federal financial aid eligibility requirements, and documentation proving the need for financial aid. If you are enrolled in school at least half of the time, the Department of Education will pay the interest on these loans – a significant amount of savings can be capitalized on during this time, especially when interest won’t accrue during this time.
Direct Unsubsidized Loans: These loans are available to undergraduate and graduate students, regardless of their financial situation. Once these loans are dispersed, the borrower is responsible for paying the interest charges that accrue. Meaning, once your grace period and/or deferment is over, interest will begin growing.
Direct PLUS Loans: These loans provide two options: Grad PLUS loans, for graduate/professional students, or Parents PLUS loans, for parents of undergraduate students. These loans differ from Subsidized and Unsubsidized as they are not needs-based, however, these loans require a credit check and may have higher interest rates. Secondly, similar to Unsubsidized loans, you are responsible for paying the accrued interest charges.
2. Private Student Loans: Offered by banks, credit unions, and other financial institutions, private loans are typically offered to students looking to refinance existing debt, or, students seeking alternative options to eligibility, interest rates, and credit requirements. These loans require the lender to have a good credit score; some lenders will even offer you to add a co-signer if you are ineligible on your own. If you are considering private loans, it’s important to compare lenders and read the fine print.
Tips for Managing Student Loans
Basic Understanding: Keep track of how much you owe, the interest rates, and the repayment terms. Use tools like the National Student Loan Data System (NSLDS) to stay informed about your federal loans.
Create a Budget: Developing a budget helps you manage your expenses while in school and ensures you can make loan payments once you graduate. Factor in living expenses, tuition, and any part-time work income. Some employers even offer student loan repayment assistance and would be wise to check in and see if options are available to you. This can significantly help you determine how much you could be paying on top of your employers assistance.
Consider Work-Study Opportunities: Participating in a work-study program can provide additional income and help minimize the amount you need to borrow. Check with your college’s financial aid office for available options.
Borrow Only What You Need: This is crucial! It might sound obvious, but I often see young adults fall into this trap: they’re offered a large loan and end up taking the entire amount instead of just what they need for school. While it can be tempting to accept the full offer, it’s important to only borrow what is necessary. This strategy will help you steer clear of unnecessary debt. Trust me, you don’t want to be paying back a large sum of money for the next 10-20 years!
Repayment Strategies
Know Your Grace Period: Most federal student loans have a grace period of six months after graduation before you are required to start repaying them back. Use this time wisely to plan your finances, and see what areas of your budget you could adjust for this new “bill”.
Explore Repayment Plans: Federal loans offer various repayment plans, including income-driven repayment options that adjust your monthly payment based on your income. Research these options to find what works best for you.
Make Payments While in School: If you can afford it, making payments while in school can prevent your loan balance from growing even further. Find an easy job on campus such as a residence hall front desk assistant or find a local coffee shop to work in on Sunday mornings. Balancing school and work can be difficult for some, however, extra income during school can save you money in the long run.
Student loans can be a valuable tool for reaching your educational goals, just be sure to plan accordingly before taking out a large loan you’ll eventually have to pay back. By familiarizing yourself with your options, budgeting effectively, and understanding your repayment options, you can navigate the complexities of student loans and position yourself for a successful financial future! Keep in mind education is an investment, and with responsible management, you can ensure it remains a worthwhile one.
Do I love student loans? Not at all, but there is a responsible way to handle them and everything that comes with them. As always, please connect with our team for additional questions or recommendations to secure your financial future!
Alexandria Miller, CPFA® Financial Wellness Advocate