Financing a college education can be a daunting prospect. As you do your research it’s easy to become inundated with all the fees, interest rates, and other price tags you’ll be expected to pay. With the cost of college ever rising, it can feel like an endless cavalcade of bad news. If you are familiar with this feeling, I may just have some much needed good news for you.
Private vs Federal Student Loans
Student loans, though oft maligned, are an integral aspect of financing for many students pursuing higher education. The amount of debt a student and their family will face as a result of loans varies rather substantially based on circumstance and planning. It is paramount to understand that all loans are not created equal. In the interest of brevity, it’s best to separate them into two categories: Federal and Private.
Federal Student Loans
Federal student loans come from the government and are often more lenient with repayment and sometimes even forgiveness. Subsidized federal loans pay the interest for your student while they are in school. For the unsubsidized loans, the interest rate is fixed and will not change over the life of the loan. The rub however is that the amount your student is eligible for, determined by your Expected Family Contribution (EFC), is a pretty hard limit- unless you qualify for a PLUS loan, which should cover the remaining cost of attendance after all other financial aid. If your student is still in need of assistance after the federal loan money is exhausted, you’ll need to seek out other means.
Private loans are murkier waters. Right out the gate interest rates are likely to be higher as the institution can make them whatever they like; as opposed to the set guidelines of federal student loans. Moreover, the interest rate is usually variable, meaning it can increase during the life of the loan, costing your student much more money. When it comes to repayment, private loans are far less lenient, usually not offering income based payment plans or deferment options. As most students won’t have an adequate credit history, parents will almost certainly have to step in as co-signers to even qualify for the loans in the first place.
Federal Student Loans are Getting Cheaper
Finally some good news, interest rates on Federal loans are decreasing. It is important to maintain the distinction between Federal and Private so as not to get the impression that all loans are getting cheaper. However, this should not mitigate your excitement too much, when it comes to paying for school, we have to celebrate the victories where we can find them.
The current interest rate for undergraduates of 4.29% will dip down to 3.76% for the coming school year. For graduate students and/or parents taking out PLUS loans, the interest rate will go from 6.84% to 6.31%, while graduate students taking out direct loans will face an interest rate of 5.31% as opposed to the current 5.84%.
These decreases may seem insubstantial (all of which are less than 1% differences) but they are far from imperceptible. In fact, these are the lowest interest rates in a decade. As these are Federal loans, there is no risk of the rate increasing over the life of the loan, regardless of the market. Though the change isn’t drastic, every little bit helps.
Delaying Retirement Savings
Unfortunately, it’s not all good news I’m afraid. Even with Federal interest rates on the decline, loan repayment is still leaving a considerable financial dent in the lives of many Americans. Students and parents in the midst of repaying student loans have begun delaying retirement saving. According to a recent poll, half of American adults with student loans (a 22% increase from 2013), are using the money they would be putting into their nest egg to pay off those student loans. What’s more, many young adults are putting off major life events such as home ownership, marriage and having kids to avoid the added financial burdens.
It isn’t difficult to see how this line of thinking could be considered prudent; waiting till one debt is paid before taking on any more. But, isn’t the very purpose of college to improve a person’s quality of life, not stunt it? Perhaps the most disheartening figure is that 71% of the people polled said they would rethink their higher education decisions; 7 out of 10 respondents are starting their adult lives with regret.
It doesn’t have to be that way. They don’t regret that they went to college; they regret how they paid for it. There are cost-saving strategies that could literally save you thousands of dollars of debt, but schools are not going to volunteer this information to you. Why would they? It isn’t in their best interest. That is why you must be vigilant when it comes to your finances. Investigate loans, investigate financial aid packages, and don’t be afraid to ask for help.
A wealth of information on debt reduction strategies can be found by visiting My College Planning Team.com. Seek out the strategies that work best to maximize the college experience, without damaging your student’s financial future. If you would like to discuss strategies with our Financial team, they offer a complimentary consultation for parents of college-bound students. Click here to schedule now.