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Paying for College

College! It’s the epicenter of higher learning. The beginning to a brighter future. But preparing for college doesn’t just mean brushing up on academic skills. You might be wondering how to pay for college!

Creating a financial plan – especially when it comes to student loans –is the key to success.

The following tips can help you decide which student loan works best for you and your family.

Federal vs. Private Student Loans

When grants, scholarships and savings aren’t enough to cover the cost of a college education, loans for college can be vital to providing the remaining funds. But how do you know which is the best for you?

Federal Student Loans

Federal student loans are often the first step for students looking for financial assistance. Fill out the Free Application for Federal Student Aid (or FAFSA) by the FAFSA deadline. Without it, you won’t have access to federal student loans – many of which are based on need or your income. Unlike many private student loans, federal loan interest rates are fixed for the life of the loan and are determined by federal law. In many cases, a co-signer is not needed. The Federal Student Aid website is a great resource to answer many federal loan questions like how much money you are allowed to borrow each year and what types of student loans are available.

Private Student Loans

Private student loans are meant to fill the gap in financial aid for college that is left between the Cost of Attendance (COA) and the Federal loans/aid you’ve received. Private loans are not offered through the federal government, so it’s important to look for a loan program from an institution you trust. United Federal Credit Union offers Members private education loans through Student Choice.

Private student loans are in the name of the student, but often require a co-signer. They are not guaranteed or subsidized by the government. Instead, they are based on the credit score of the student and/or the credit score of any co-signer they have on the loan. Look for a loan with no origination fees, low interest rates, flexible deferment and repayment options, and an easy application process. You’ll also want to make sure that the loan is certified through the school—which means the school verifies the amount you need to borrow to prevent you from borrowing too much or too little. Funds should be given directly to the school and any difference back to the borrower for books, transportation, technology and other necessities.

Repaying Student Loans

When it comes time to repay your student loans, there are many factors to consider before you begin. United’s educational partner, Student Choice, has provided answers to some questions you might be asking as you begin life after college.

What type of student loans do I have?

You may have federal loans, private loans, or a combination of both. The most common types of federal loans are Direct loans, previous Stafford (formally GSL loans, and now called “Direct” loans) and Perkins loans. Direct loans are either subsidized (need based), where the government pays the interest while you are in school or in a period of deferment, or unsubsidized, where you are responsible for the interest from the moment the loan is granted. If your loan is unsubsidized, you have the option to pay the interest as it accrues, which will save you money long-term, or wait until the loan comes due and the interest will be capitalized. Perkins loans are always subsidized, while private loans are not. PLUS loans are made directly to parents for their dependent children’s education, and HEAL loans for healthcare students are both federal and unsubsidized. There are many other federal and private loans available that are specific to the student’s area of study, and many states have their own student loan programs for education and health programs.

Who is currently holding my loans?

If you have current federal loans, chances are they are not with the original lender, but have been sold on the secondary market. If you have current private loans, they are likely held by the original lender. Perkins loans, however, may still be with the school that issued them or with a servicer, who is hired to collect payments. If your federal loans are in default, they may be with a guarantee agency (a state or private insurance company that pays the loan if you default), a collection agency, or the Department of Education. If your loans are older than ten years since they first became due, they will most likely be held by the Department of Education and serviced by a collection agency. For private student loans in default, contact your original lender, and for loans made from university funds, your school may still have them. Another way to determine who now holds your loans is to check your current credit report.

How much should I pay?

Most borrowers pay their student loans within ten years, but this is by no means the only payment option available. Depending on your financial circumstances, you may want to accelerate your payments, or lengthen the term and concentrate on paying off higher interest debts first. Before you make a decision, first analyze your total financial situation. Make a detailed budget to review your income, expenses, and debt. After you understand how much you have to work with, you can decide which payment plan will work best for you. Many lenders offer a variety of repayment plans for loans in good standing, particularly for federal loans. Perkins loans generally have their own payment arrangements, however. Private loans tend to be difficult when it comes to negotiation, but contact your lender for a possible payment restructure.

• Accelerated — There are no prepayment penalties for student loans. If you have no other loans with a higher rate of interest, stepping up your payments will save you a lot of money. This is a good option for people who can afford higher payments.
• Standard — This is the original plan most lenders immediately offer borrowers. To estimate payments, figure about $125 per month for every $10,000 borrowed. Payments are fixed for up to ten years, although payments on variable interest rate loans may increase or decrease over the life of the loan.
• Graduated — Payments may start out as low as half of what the standard plan may offer (but never below the interest amount), are increased every two to three years, and can be stretched out from 10 to 30 years. This plan may be appropriate for you if your income is low now, but you expect to earn more in the future.
• Extended — This plan enables the borrower to have fixed monthly payments over a period of 12 to 30 years. Though you will pay more in interest than other plans, it is great for those needing low payments over the long-term. Income Contingent – Income, family size, and loan amount are taken into consideration when determining your monthly payment for this plan. Your financial circumstances are reassessed every year, and as your income rises and falls, so does your payment. If your income is low or unstable, this plan may be right for you.
• Consolidation — You can lower your monthly payments by combining several loans into one packaged loan and extending the repayment period. Consolidation may be a good option for you if the bulk of your loans are federal (private loans are generally not combined with federal loans), the interest rate is better than what you are currently receiving, and you have at least $7,500 in total eligible loan debt.

If You Can't Pay

There are several options you may want to explore if you find you cannot pay your student loans:

Deferment

You may be able to temporarily postpone payments on your loan with a deferment. If your loans are subsidized the interest will also be suspended; if not, interest will continue to accrue. Deferments are only accepted under certain circumstances: if you are a full or half time student, have a temporary total disability, are unemployed, have economic hardship, are enrolled in a rehabilitation program for the disabled, or are a parent with young children.

Forbearance

If you don’t qualify for a deferment, you may be able to postpone or temporarily reduce your payments with a forbearance. Forbearance is less attractive than deferment, because whatever the type of loan, interest will continue to accrue.

Cancellation

The circumstances in which a loan may be canceled in full include: death of the borrower, permanent total disability, and attendance at a trade school where you were either falsely certified or the school closed before you could complete the program. Some loans may be partially canceled if you are a member in a uniformed service, teacher or provide services to needy populations, work in health care professions, or work in law enforcement. Check with your school or lender for details about cancellation.

Bankruptcy

Student loans are extremely difficult to discharge in a Chapter 7 bankruptcy. You must prove undue hardship, and they are rarely accepted. However, you may include your student loans in a Chapter 13 bankruptcy, a reorganization of debt. Though student loans must be repaid in full, interest and collection costs cease, and collection action such as wage garnishment ends the moment you file.

The Bottom Line

As with any major financial decision, it is important to understand all of your options and know your goals and borrowing limits. Federal Student Aid provides a Repayment Estimator that can be a useful tool to help you explore a variety of repayment scenarios.