As many college graduates begin thinking about their dreaded monthly student loan payments, the soon-to-be-freshman are tying up loose ends on their financial aid packages, including a large portion of student loans. In fact, Americans have accrued more student loan debt than credit card debtâ€”over $900 billion. The total amount is set to hit $1 trillion this year.
BlackEnterprise.com spoke with Curtis Johnson, president and chief operating officer of Student Funding Group, on why college-bound students should create a budget, how students can lower debt while in school, and the reason parents should let college students front the bill (just a bit).
- PLAN AHEAD
The earlier both parents and students prepare, the better. Be sure to adhere to the schoolâ€™s recommended deadline for filing financial aid or face the prospect of not receiving aid at all.
Parents: Start saving early. It doesnâ€™t have to be a large amount, but anything counts. If your savings canâ€™t go towards tuition costs, at least it can assist with the smaller payments, such as room and board, books or additional fees.
Students: Prepare to work. Even if you donâ€™t qualify for work-study, seek a temporary or part-time job to assist with other expenses. Working before you reach campus can give you a jump start on personal savings.
- CREATE A BUDGET
Every university and college lists the estimated cost of attendance on their website and the figures are updated yearly (if itâ€™s unavailable, it can be mailed or emailed to you upon request). Start thinking about what the family can contribute realistically towards this education. Factor in savings, outside scholarships and all finances separate from your financial aid award. Once a studentâ€™s financial aid package arrivesâ€”breaking down how much was awarded in scholarships (i.e. merit-based, athletic or departmental), grants and federal loansâ€”the family can determine how much is needed in additional assistance from an alternative (or private) loan.
- MAKE PAYMENTS WHILE IN SCHOOL
It sounds like it would work in a studentâ€™s favor to wait until after graduation to start paying down the principal or the loanâ€™s interest, but not so.
â€ś[Students] can at least make the interest payments,” says Johnson. â€śThereâ€™s no penalty for paying these loans early. If they can afford to make the interest payments, we advise students and parents to do that, which is another good way of keeping the cost down on their student loan.â€ť
- PARENTS, TAKE A BACK SEAT WHEN IT COMES TO APPLYING FOR LOANS
Let students get the loan in their name, allowing them to borrow the maximum amount possible through the financial aid award, Johnson advises. Federal loans have a lower interest rate than the PLUS loan, making this a more viable option. If parents want to assist after the student takes the loan out in his or her name, they can do so outside of taking the loan out in their name. Assisting with the interest rate is a better option.
- NO ONE LOAN IS THE SAME, SO KNOW THE DIFFERENCE
Hereâ€™s a breakdown of each type of loan:
- Federal Perkins Loans (need-based) â€“ Awarded by colleges to students with the highest need. The interest rate is relatively low at 5% and you donâ€™t make any loan payments while enrolled in school. Undergraduates can borrow up to $4,000 a year, totaling not more than $27,500 overall.
- Federal subsidized Stafford Loans (need-based) â€“ The fixed interest rate is 3.4% for the 2011-2012 academic year. The government pays the yearly interest while you’re in school. Undergraduates can borrow up to $3,500 for their freshman year, but the limit rises as a student progresses through school.
- Federal unsubsidized Stafford Loans (not need based) â€“ The interest rate is set at 6.8%. As a dependent undergraduate, you can borrow up to $5,500 minus the amount of your subsidized Stafford, if you have one. That applies for a studentâ€™s freshman year; the limit rises as he or she progresses through school. If you’re an independent student or if oneâ€™s parents can’t borrow a PLUS Loan, the limit increases by $4,000. You’re responsible for paying interest on the loan while in school, but can capitalize the interest by adding it to the principal.
- Federal parent PLUS Loans (not need based) â€“ The interest rate is fixed at 7.9%. Parents can borrow up to the total cost of education, minus any aid received.
- Private (alternative) loans (not based on need) â€” Rules and stipulations vary depending on the lender