Going to college is an exciting time, whether you've just graduated high school or are an adult student looking returning. In either case, how do you pay for it?
The cost of a college education continues to outpace wage growth and it's estimated the price of a four-year education is going to increase over the next decade. A news report said the average cost of tuition and fees in the 2018-2019 academic year was more than $35,000 at private colleges, about $9,700 for state residents, and $21,600 for out-of-state residents attending state colleges.
Sure, there are financial aid and scholarship opportunities, but some of them are highly competitive and, if partial aid is awarded, it'll only stretch so far for the average student. Many prospective students seek student loans for at least a part of their college education.
Types of student loans
There are two types of student loans: federal and private. Federal loans are backed by the U.S. government and private ones are offered by banks and other private institutions.
Federal student loans
The federal government offers four types of college student loans, typically with special low-cost options and terms that usually do not require a co-signer.
- Direct subsidized loans are based on financial need.
- Direct unsubsidized loans are not based on financial need or credit score; the college determines how much you're eligible to borrow based on financial aid you've received and the cost of attending that school.
- Direct PLUS loans are structured more like other traditional loans, credit-based, unsubsidized and geared toward adult and graduate, or professional students.
- Direct consolidation loans allow students to combine all money borrowed from various lenders and repay the loan to one servicer.
To apply for a federal student loan, you must file a Free Application for Federal Student Aid (FAFSA®). It costs nothing to file the application, but it may take a while to get a response.
Students can apply for private student loans at banks, credit unions or other financial institutions. Those are usually the last option once financial aid, scholarships and federal loans are exhausted.
- A student loan is money borrowed by the student, but often requires a co-signer, usually a parent, or someone with good credit.
- Parent loans are taken out by the parent for the child.
To apply for private student loans, you deal directly with the lender. Generally, the stronger your credit, the lower the interest rate, and an answer is typically given quickly.
When determining whether a federal, private or combination loan is right for you, pay close attention to the interest rates, repayment schedule and other important terms.
Possible restructure of student loans
Student debt is the No. 2 two form of consumer debt, behind mortgages. According to statistics, 44 million student loan borrowers in the United States collectively owe $1.5 trillion. Because of that debt, the U.S. government is looking at overhauling the traditional format of student loans. The current proposal aims to:
- Add loan caps to limit the amount that can be borrowed from certain types of federal loans
- Simplify student repayment
- Restructure current public loan forgiveness programs (effective in July 2020, so students applying before then would still be eligible to apply).
If passed, the changes would update the 1965 Higher Education Act, which has had eight updates, the last in 2008. Keep in mind, that doesn't apply to private student loans. Graduates struggling with paying off private student loans can look at other options such as renegotiating loan terms, bankruptcy and employer assistance with payments. With special circumstances, such as predatory loans, there are other options people can pursue.
A murky future
Still, the availability and structure of student loans face a murky future. Students may see changes in access to federally backed student loans, ultimately with a ripple effect on how private loans are structured.
Income-driven repayment plans are available that cap payments based on discretionary income, forgiving the balance after 20 to 25 years of payments, but they also may be affected by the changes. The government's goal is to increase access to financial aid, but its effect on the amount that must be borrowed is unclear.
Another government proposal would amend "529 Accounts" (Section 529 of the Internal Revenue Code) to pay off student loans. It awaits action by the House.
At GuidedChoice, we are firmly committed to helping people reach financial freedom. Our solutions are designed to help them make smarter financial decisions in a way that helps them achieve their financial goals. To learn more about our service and whether you are eligible to receive our services through your employer, contact us today.
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