Five Must-Know Facts About Student Loans

College Financial Aid
You hear it all the time: College is a good investment. An adult with a college education can expect to earn at least $20,000 more a year than his non-college-educated counterpart. Over 40 or more years of working, that’s a difference of $800,000 or more.
But coming up with the money to invest in college is a challenge for most families, especially because the cost typically increases at twice to four times the rate of inflation. That means that each year, paying for college becomes even harder, and barring any major bumps in your income or a boost in scholarship money for your student, it will likely cost you more to send your student to college her senior year than it will her freshman year. (For more financial aid tips, go to newsday.com/college preptalk.)
So chances are good that your student’s financial aid package will include loans. Before he borrows, you both should understand these five facts about student debt:
1.There are two basic types of loans: public (or federal) and private (also called alternative student loans). Public loans can be broken into two categories: student loans, such as the Perkins and Stafford, and parent loans, such as the PLUS loan. If your family needs to borrow money, first accept public loans because they almost always have lower interest rates than private loans. Plus, federal loans have fixed rates that can’t exceed a certain amount, while private loans’ rates-which have no cap-will likely increase as the economy recovers.
2.Subsidized public loans are best because the government pays the interest while your kid is enrolled in school. These loans are need-based, but there’s a cap on how much one student can get. The Perkins has the lowest rate, while subsidized Stafford loans tend to have slightly higher-but still very good-rates. (Hint: Pay close attention to your kid’s aid packages because colleges often offer unsubsidized Stafford loans as well. Be sure you know which kind you’re getting.)
3.You don’t have to accept all of the loan money in your child’s financial aid package, but it’s up to you and your student to figure out how to make up the difference. It’s a good idea to decide ahead of time-before you get any financial aid packages-how much you’ll borrow. If you’ve set a limit, you both will be able to review aid packages more objectively.
4.So how much should you borrow? The short answer is as little as possible. Financial gurus often suggest that the total loan amount not exceed your child’s expected first-year earnings. But unless your child is absolutely sure what she’s going to pursue and how much she’ll earn, the better option is to make sure you all understand what the loan will really cost. Loan repayment terms are typically 10 years, and for every $1,000 of federal money borrowed, your child can expect to pay about $12 per month for a decade; for private loans, it’s more like $16 per month (though variable interest rates mean she could pay much more). Online loan calculators can help you determine just how much a loan will cost.
5.Shop around for a lender. Once you know which loans you will accept, you should find the lender that offers the best deals, such as discounts on interest rates, fee waivers or rebates, and principal reductions. Colleges will publish preferred lender lists, but don’t just choose the first lender on the list. You could save some serious cash by finding the best deal.
And one more thing: Repayment of loans is serious business, so it’s important to establish with your kid who will be responsible. Because many loans will be in her name, on-time repayment is a great way for her to build good credit; conversely, if she’s repeatedly late, the government can garnish her wages and withhold tax refunds. (And bankruptcy often does not erase student loan debt.) These are extreme cases, but before you and she decide to borrow, be sure she understands her end of the deal.
Snowy mix hits region ... What's the future of NUMC? ... LI Swifties ready for the big game ... Chow down in Charleston ... What's up on Long Island
Snowy mix hits region ... What's the future of NUMC? ... LI Swifties ready for the big game ... Chow down in Charleston ... What's up on Long Island