June 2019: Taking Out Student Loans
Welcome back for part two of our multi-part series on student loans. If you missed part one, “Do You Need Student Loans?”, consider reading it here. This month’s article, part two, will discuss some key items that should be considered before a student or their guardian takes out student loans. Though this article is directed at a parent or guardian advising their student, a student can apply this information just as easily.
If you have decided to use student loans, then this article should provide you with clarity on some key details concerning student loans. An overarching key detail that parents or guardians should understand before they begin this process, if your student is over the age of 18 then their respective school will treat your student as a legal adult. Meaning, the school will not release confidential information to you the parent/guardian, regardless of what information you already know.
Is it difficult to take out student loans? For a student to take out a student loan, they would simply fill out an application with their respective school’s financial aid department, which would then determine how much in loans they qualify. As discussed above, if your student is over the age of 18, their personal financial choices will be directly between them (student), their school and the lender. With the ease of borrowing these funds, the money can feel free and thus be very enticing for a student. And unless you have access to your student’s university accounts, this can all be done without the parent/guardian’s knowledge. In saying this, it is important to make sure your student understands the benefits and costs of student loans in addition to how this loan will be repaid.
Who would lend your student money? The Federal government funds the vast majority of student loans. Out of the $1.6 Trillion outstanding in student loans, $1.4 Trillion has been funded by the Federal government, or 92%. Privately funded student loans, which are loans funded by banks and other for-profit businesses, fund the remainder of student loans. Most private loans are usually used for better interest rates, student loan consolidation or when a student has reached their total Federal loan limit. Federal student loans do have annual limits on how much a student may borrow, which varies by student and school; you should contact your school’s financial aid office for more information about loan limits.
What are the major differences between Government and private loans? The terms and rates of Federal student loans are set by Federal law (Congress), not the Department of Education. Whereas, with a private loan, the terms and rates vary by lender. In addition, federally funded student loans offer more flexibility to the borrower than private loans. Such flexibility options, as the ability to defer repayment, subsidize interest costs, alternative repayment structures, and the ability to pause your loan repayments due to an emergency. Some private lenders will offer these flexible loan repayment options, but it varies by lender. Private student loans are essentially personal loans with a lender; therefore, you agree to a set of terms set by the lender. Read more about the differences here.
Who will be responsible for the student loan? For Federally funded student loans loaned directly to the student, known as direct loans, the student will be solely responsible for that loan. In addition, these do not require a credit check of the student. Most student loans are direct student loans. As their guardian, you will not be required to co-sign on the loan. If you, the guardian, chooses to take out Federal loans for your student in your name, known as parent PLUS Loans, the loan will be a Federal loan in your name and will require additional qualifications such as a credit check. Parent PLUS loans are typically used when a student has maxed out their Federal loan limit. If your student goes through a private lender, the signer(s) on the loan will be required to go through a lender specific qualification process such as credit checks and other lender requirements.
How are student loans structured? For every semester funded by loan money, it will require the borrower to take out an individual student loan for that semester. Unlike a line of credit where you access funds on a need-be basis, each semester’s loan is a separate loan. Therefore, each time a loan is taken out to fund a semester of school, it will have its own interest rate and its own repayment schedule. For example: If you went to school for two years, or four semesters, and needed loans for the four semesters, you would have four separate loans.
What is the interest rate for student loans? Current student loan interest rates are between 4.5%-10%. Depending on a number of different variables, including but not limited to: the type of student loan acquired, the college level being funded (graduate vs. undergraduate), the length of the loan, the current interest rate environment and your credit rating if you’re guaranteeing the loan. Federally funded student loans have fixed rates set by the government. Be aware, if multiple Federal loans are taken out while you’re in school, each loan will probably have a different fixed rate. Privately funded loans offer similar fixed rates, but they can also offer a loan with a fluctuating rate, known as a variable rate loan. A variable rate loan is a loan that features an interest rate that varies as the interest rate environment changes. More can be read about different interest rate loan structures, here.
There are a number of additional resources available at your disposal to help educate you on student loans, including websites run by non-profits, the University’s financial aid department, and us. Please contact us about any additional questions you may have concerning student loans.
Government Student Aid Website