Everything You Should Know About Student Loans

If you are reading this then you know the cost of a college education is expensive and you are looking for a way to pay for it. Unfortunately most cannot cover the cost of college solely on scholarships, grants, and work-study. Most likely, if your child is attending a private school, a 529 Plan, savings, and/or retirement will not cover the cost for all four years of college either. So maybe it is time to look into student loans. Loans are not necessarily bad. You just have to be a smart borrower.  Let’s take a look at the different loan options. There are 3 loan options: Direct Loans, Perkin Loans, and Private Loans. For this post we will be covering direct loans. Under the William D. Ford Federal Direct Loan Program there are three types of loans Subsidize, Unsubsidized, and Parent PLUS. We will save the Parent PLUS loan for our next post. Let’s delve into the world of subsidized and unsubsidized loans.

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7 Things To Know About Student Loans

 Everything your should know about student loans for college. A college education is becoming increasingly expensive. Scholarships, grants, and work-study usually won't cover the full balance of your student's account. At some schools neither will your 529 savings plan, retirement, or other savings. Another way to cover the cost of your child's education is with student loans. Student loans are not all bad. You just need to be a smart borrower. Here is everything you need to know about student loans for college.

1. What is the difference between subsidized and unsubsidized loans?
Subsidized Loan – Interest is subsidized by the Department of Education while enrolled in school. Interest doesn’t start accumulating until after student graduates, falls below half-time hours or withdraws from school.
UnSubsidized Loan – Interest begins accumulating when the loan funds are released to the school on your student’s behalf.

2. Who is the borrower?
The borrower of subsidized and unsubsidized loans is the student. These loans are in the student’s name.

3. Who is the lender?
The lender of direct loans is the Department of Education.

4. Do student loans have interest?
Student loans do have interest. Interest rates are set by Congress and are subject to change each academic year. The good thing about direct loan interest rates is they are fixed rates for the life of the loan. This means whenever you borrow the loan whatever the interest rate is at the time you borrow, that will be the interest rate until the loan is paid off.

 Current interest rates for student loans for college. Interest rates are set by Congress and can change. The rates shown are for loans first disbursed on or after 7/1/17 and before 7/1/18. Interest rates for Direct Loans are fixed for the life of the loan. Source: studentaid.ed.gov

5. Are than any other fees?
There is a loan fee that is taken out before the student loan has disbursed. The loan fee is essentially a processing fee.

 Loan fee amount for student loans for college. A loan fee is a processing fee that is taken out before the direct subsidized and unsubsidized student loan is disbursed to the school. Loan fees are subject to change each academic year. The current loan fee is 1.066% for the time period on or after 10/1/17 and before 10/1/18.

6. When do student loans have to be repaid?
All direct loans have a grace period of 6 months. This allows students time after graduation to find the means (job) to begin repaying the money borrowed for school.

7. How do I repay my loan?
Another great thing about direct loans is the flexible repayment plans. At the moment there are 5 repayment plans. We will discuss this in further detail later in this post.

How to Apply for Student Loans

In order to receive a direct loan you first have to file the FAFSA. The FAFSA is the Free Application for Federal Student Aid. Schools use the information on the FAFSA along with their cost of attendance to determine what aid your student is eligible to receive. This information is then placed on an award letter and sent to your student from the Office of Financial Aid. There are set loan amounts based on dependency status, year in school, and financial need. Also keep in mind these amounts are for the entire academic year.

 Loan limits for direct subsidized and unsubsidized student loans for college. Loan limits are based on dependency status, year in school, and financial need.

Before you and your student determine the amount to borrow, remember your student is borrowing for the entire year. Most schools run on a semester schedule this means the loan will disburse once in the fall and once in the spring. This is very important to know so that you borrow enough to cover each semester’s balance. Also keep in mind there is a loan fee that will be taken out before the loan is disbursed to the school. When you and your student have determined to borrow loan(s) and the amount to borrow, your student will want to accept the loan(s) and notify the Office of Financial Aid as to the amount your student wishes to borrow. We always recommend borrowing subsidized loans before unsubsidized. Something that is very important when borrowing loans is only borrow what you need.

After your student has accepted the award letter and notified the Office of Financial Aid as to the amount of loans your student wishes to borrow, they will have to complete Entrance Counseling and a Master Promissory Note. Schools will not disburse loan funds until these two components are complete. Entrance counseling explains everything your student needs to know about direct loans. A Master Promissory Note is a document that your student signs, promising they will repay the loan. Both entrance counseling and master promissory note can be completed at studentloans.gov.  Parents, make sure your student completes entrance counseling and the master promissory note. Your student is the one borrowing the loans, they need to know what to expect.

 After You Apply for Student Loans

After your student has completed entrance counseling and a master promissory note, the school they are attending will be notified. At that time the school will schedule the loan to disburse. A disbursement is the releasing of funds from the Department of Education to the school your student attends. The school then transfers the funds to your student’s account. There the funds will cover your student’s account balance. If your student has a credit balance, this means money left over after all expenses are paid, a refund will be sent to them. Most schools at the beginning of the year will ask for your student to set up an electronic funds transfer. This is to allow the school to transfer any credit balance on your student’s account to their personal bank account. There are schools that have their own debit card in which refunds are added to. How a student receives their credit balance varies on the school. Again we want to stress that you should always, always, always, only borrow what you need.

In the event that your student does have a credit balance and receives a refund, here is a picture from Federal Student Aid of how that refund can be spent. Loan funds are intended to only be used for tuition and fees, living expenses, books and supplies, transportation and other educationally related expenses.

 This is a picture from Federal Student Aid of what you can spend your financial aid for. If your student ends up with a credit balance on their student account, that balance should only be spent on educationally related expenses. Usually a student ends up with a credit balance they have borrowed student loans for college.

Student Loans after Graduation

When your students is about to graduate from college, they will need to complete exit counseling. This also can be completed at studentloans.gov. Exit counseling basically covers your student’s responsibilities for repaying their student loans. The counseling will cover all the repayment options as well. Some schools require the completion of exit counseling as a part of the exit interview process leading up to graduation. It is important your student complete exit counseling or they may not be approved to graduate.

After your student graduates from college, their servicer will be notified by the school. A servicer is an organization that services the loans. Your student will be placed in a 6 month grace period where they will not have to repay their loans. Keep in mind the interest on the unsubsidized loan is still accumulating and the interest on the subsidized has started to accumulate at this time. 6 months is basically the amount of time allowed to find a means to repay (job) the student loan. When the 6 month grace period is up, the student loan will enter into repayment. Your servicer will begin to contact your student a few months before repayment begins. This is the time when your student will need to determine what repayment plan works best for them. It is always important that your student keep the most current contact information up to date with their servicer. Oh and the six month grace period does not only apply to student’s who graduate. Anyone who has a loan and graduates, falls below half-time hours or withdraws from school will automatically enter a 6 month grace period and then repayment.

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Borrowing money can be scary. What are your concerns about borrowing student loans?

Download the FREE Step-by-Step Guide to completing direct loan entrance counseling and master promissory note. Anyone wanting to borrow student loans must complete Entrance Counseling and a Master Promissory Note.