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Twelve Things You Need to Know About College Loans

How to ease the financial pinch.

As higher-education prices continue to rise steadily across the country, parents face the challenge of covering these costs as their kids head to college.

A growing number of families have been turning to college loans to ease the financial pinch.

Here are 12 things that you should know about borrowing for college:

1. To qualify for any federal college loan, a family must file the Free Application for Federal Student Aid (FAFSA). Many of your clients probably assume that they won’t need to file for financial aid, but that’s the only way to borrow through the federal government.

2. Some parents worry that if they file the FAFSA, even if it’s only to qualify for federal loans, that some schools (most notably highly selective private institutions) will reject their child’s application. Private schools routinely favor high-income students, and a prime reason is because they don’t have the financial need that many applicants possess.
A way to alleviate this concern is to file the FAFSA after the child has been accepted to the school.

3. Parents should not regard a late FAFSA filing, however, as a way to qualify for need-based aid from a school. College admission officers get irritated if a child states on the admission application that he or she won’t be filing for financial aid and then switches positions after  an acceptance in a bid to get need-based grants  from an institution. It’s unlikely that a student, even if eligible, would receive need-based aid after pulling that trick.

4. The federal Direct Loan is widely considered the No. 1 loan among all the borrowing possibilities. Only college students can borrow through the Direct Loan.

Students who are attending college at least part-time can obtain the Direct Loan, which offers a fixed interest rate of 3.76 percent for the 2016–2017 school year. The interest rate is set annually based on the 10-year Treasury.

5. There is a limit on how much students can borrow. For most undergrads, here are the limits:

Freshmen: $5,500
Sophomores: $6,500
Juniors: $7,500
Seniors: $7,500
_________________

$27,000

If a child takes more than four years to obtain a bachelor’s degree (and the majority do), the most that undergrads can typically borrow is $31,000.

6. Undergrads can borrow significantly more, however, if their parents are turned down when applying for the PLUS Loan, which is the federal loan for parents. Certain adverse marks on a parents’ credit history, such
as bankruptcies, foreclosures and 90-day late payments on debt can make them ineligible for the federal loan.

The PLUS Loan allows a parent to borrow enough to cover the gap between the cost of the school and a child’s financial aid package, which would include the Direct Loan and any grants/scholarships. 

Here’s an example:

  $50,000 cost of attendance
–$18,000 student grants
                and Direct Loan
_________________________

  $32,000 = amount parent
                   could borrow
                   through a
                   PLUS Loan

7. Strangely enough, parents can’t be turned down for a PLUS Loan even if they have no realistic ability to repay the debt.

Since the federal government isn’t significantly limiting parent borrowing, it’s critical for parents to calculate how much is safe to borrow. They can do that by using the federal loan repayment estimator at studentloans.gov.

8. Parents with excellent credit histories may also want to explore private college loans. These private loans have traditionally been designed for students, although the vast majority of them require an adult cosigner.

Here are the sources for private college loans:

  • Traditional banks
  • Online lenders
  • Credit unions
  • State lending authorities

Your clients should also know about a new type of private college loan now available exclusively to parents. A few lenders are offering parent loans, including Wells Fargo, Sallie Mae, SoFi and Citizens Bank.

9. The interest rates on private loans designed for students or parents will be highly dependent on the borrowers’ credit history.

10. When looking at private loans, your clients need to be aware that these loans don’t provide the protections that federal loans do.

Private loans, for instance, don’t offer income-based repayment plans, which are features of the federal lending programs. Qualified students with federal loans can make payments based on a formula that calculates what they can pay based on their discretionary income. There are several federal repayment plans, including Pay As You Earn.

The federal lending programs also offer loan forgiveness options, including for borrowers who end up as teachers and work in public service jobs. Private college loans don’t offer loan forgiveness opportunities.

11. A great resource when exploring private loan options is a new website, privatestudentloans.guru. Mark Kantrowitz, a nationally recognized financial aid expert, created the website, which includes background on private loans, as well as lists of lending institutions. It also provides a great deal of information on loan repayment choices.

12. In June, Fidelity Investments launched a free tool that anyone can use to help borrowers manage their student debt and evaluate their repayment options. It’s available at new.fidelitylabs.com/student-loans.

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