As recently as the early 1990s, most students didn't require student loans, but today about two-thirds of students end up borrowing for college.
While families are increasingly relying on loans, many teenagers and their families fail to make the best loan choices.
The latest student loan year began July 1 so this is an excellent time for you and your clients to become familiar with the intricacies of college debt. Families that understand their options are more likely to make smarter decisions and ultimately cut the cost of college.
Here are seven tips to get you up to speed.
1. The best college loan for students is the Stafford Loan.
The Stafford Loan is designed exclusively for students, who must attend college at least halftime to qualify. Regardless of credit scores, all students receive the same fixed rate and protections.
There is a limit on the amount of money that students can borrow each year through the Stafford Loan program. Here are the maximum amounts:
There are two types of Stafford Loans—a subsidized and unsubsidized version. The subsidized loan is the more valuable one because a student with one of these will not be responsible for the interest that accrues while they are in school. The federal government covers the interest payments.
The interest rate on the unsubsidized loan is 6.8 percent. As I write this column, the subsidized interest rate was scheduled to increase from 3.4 percent to 6.8 percent though Congress has been debating whether to maintain the lower rate.
Students will learn if they qualify for a subsidized Stafford when they receive their financial aid packages. The decision depends on the financial wherewithal of the family and the cost of the institution. The greater the cost of the school, the more likely a student will qualify for the subsidized loan. Six percent of subsidized Stafford borrowers come from households with incomes in excess of $100,000 and 24 percent have family incomes between $50,000 and $100,000.
2. Look for borrower protection.
I'd argue that the most attractive feature of the Stafford is its built-in safety net, which is a plus for students who worry that they will end up underemployed or without a job and won't be able to repay their loans.
This won’t be a problem with the Stafford as long as students apply for the federal Income-Based Repayment Plan or IBRP. Essentially this program allows qualified students to repay their loan based on what they can afford not what they owe.
3. Consider parent options.
While the Stafford is a no brainer for students, parents' choices are more complicated. Parents can borrow through a home equity line, the federal PLUS Loan for Parents or cosign a private student loan for their child. Some parents also dip into their retirement accounts, which I certainly wouldn't recommend—and I'm sure you wouldn't either.
The PLUS Loan offers parents a fixed interest rate of 7.9 percent and charges a 4 percent fee on the loan amount. Parents can begin paying 60 days after the loan is disbursed or wait until six months after the child graduates, stops attending school or drops below half-time status.
Because the PLUS interest rate is high in this low interest-rate environment, using a home equity line of credit will probably be cheaper. The caveat is that none of us knows what will happen to interest rates in the future.
For those who itemize, the interest on equity lines is tax deductible. In anticipation of having to borrow to pay for my own children's degree, my husband and I took out a line of credit with Charles Schwab years ago at one percentage point below prime. My daughter has graduated from college and my son is halfway through and I haven't had to touch it yet, but that's where I would turn if I needed cash for college.
4. Check out credit unions.
Credit unions are relatively new players in the private loan niche and they are well worth taking a look at. The non-profit credit unions are routinely going to be the cheapest alternative. While rates can change, recently the rates on private loan rates through credit unions were as low as 4.7 percent. An excellent place to look for college credit union loans is cuStudentLoans.org.
5. Check school credit unions.
Some colleges and universities maintain their own credit unions to tap for student loans. Institutions with credit unions include Harvard, University of Chicago, Amherst, Mount Holyoke Smith, Princeton, MIT and the California State University system.
6. Apply for multiple loans.
Unfortunately, you won't know what private loan rate you will qualify for if you don't actually go through the process of applying. Unfortunately, many parents do not apply for multiple loans, according to Sue Kim, the chief executive officer of AllTuition, which is a private loan comparison site. She told me that shoppers look at many loans on AllTuition, but rarely apply for more than one.
If you're interested in comparing private college loans, try these three comparison sites:
That advice might seem imminently doable to follow, but when a teenager is in the midst of selecting a college it can be tough to remain financially disciplined. A parent, for instance, recently asked me about her daughter who wanted to borrow $27,000 a year for school. I told the mom that this would amount to financial suicide and recommended that the daughter find a different school. After responding to the mom’s email with my advice, I never heard back from her.