The college admission experience for most high school seniors is over.
Most know where they will be attending college in the fall.
At this time of year, the excitement of the pursuit now gives way to a less pleasant aspect of the college hunt: paying the bill.
More than two-thirds of students are now borrowing for college. And the debt level, according to Federal Reserve figures, has increased at an alarming rate. In 2006, the student debt stood at $521 million and by the end of 2018, the debt had soared to more than $1.5 trillion. That represents an increase of 201 percent. The average debt load for graduates of the Class of 2018 was $30,000 versus $21,000 in 2006.
With the need to borrow for college so pervasive, here are eight things your clients need to know about borrowing responsibly:
1. For students, the best loan to obtain is the federal Direct Loan, which you will sometimes see referred to as a Stafford Loan.
Here are the reasons why this is the superior loan:
- The interest rate is almost always better than the rate for a private college loan.
- College students, regardless of their income, qualify for this loan if they are enrolled at least half time and complete the Free Application for Federal Student Aid.
- Students receive the same rates regardless of credit scores.
- The loans offer a public service student loan forgiveness program, although the program so far has forgiven few loans.
2. The interest rate for the Direct Loan, which is linked to the 10-year U.S. Treasury, is established every May. The new interest rate takes effect each year on July 1, which is the first day that families can obtain a federal loan for the upcoming school year.
3. There are two versions of the Direct Loan for undergraduates.
The subsidized version is superior because the federal government pays the interest that accrues while the student is in college and in the six-month grace period after graduating. Students also won’t be responsible for the interest if they take a deferment during the repayment period.
In contrast, interest will always accrue for holders of the unsubsidized version.
4. Both Direct Loan versions share the same interest rate, which is currently 5.05%. The unsubsidized version of the Direct Loan is also available for graduate and professional-degree students, but the interest rate is higher at 6.6%.
5. According to recent comments by Betsy DeVos, the U.S. Secretary of Education, currently fewer than 25% of student borrowers are paying down their principal—the amount they originally borrowed. This can easily happen because of the interest that accrues on the unsubsidized Direct Loan.
To keep the accrued interest from piling up, borrowers should consider making at least interest-only payments while they are in college. Students should ask the loan servicer if they can obtain a discount on the interest rate if they start paying down the debt when they are still in college.
6. Based on the information contained in a family’s Free Application for Financial Aid, the college will determine if a student will qualify for the subsidized loan or just the unsubsidized version.
Only a portion of the loan can be the subsidized version. For instance, a college freshman can borrow up to $5,500 through a Direct Loan, but no more than $3,500 can be subsidized. You can see the entire borrowing limits breakdown here.
Through their undergraduate years, students can borrow up to $31,000, and no more than $23,000 of this amount can be subsidized.
7. Independent students can borrow a maximum of $57,500 with the ceiling for subsidized loans being the same at $23,000. Undergraduates can also borrow this higher amount through the Direct Loan if their parents were rejected for the federal PLUS Loan.
The PLUS Loan is intended as an option if a family needs to borrow more than the Direct Loan will allow. The terms for the PLUS Loan are less attractive than the Direct Loan, and the interest rate, which is currently at 7.6%, is always higher. The PLUS also charges a 4.2% fee for the loan amount.
A parent can be rejected when applying for the PLUS if he or she has an adverse credit history that includes a bankruptcy, foreclosure, tax lien or wage garnishment.
Maxing out the Direct Loan is the smartest move before turning to the federal PLUS Loan or private college loans.
8. Students will discover if they qualify for the subsidized loan when they receive their official financial aid award from a college.
Most students who receive the subsidized loan have average household incomes of less than $50,000.