Do you need to borrow to fund college education for yourself or your child? I wrote this guide to tell you about my Clark Smart approach to student loans.
Read on and let me help you with the #1 problem in so many people's financial lives!
Types of student loans available for 2016-2017
|Loan type||Interest rate||Amount you can borrow||Does interest start in school?|
|Direct Subsidized Stafford Loans||3.76% (undergraduate students)||$5,500 - $7,500 annually||NO|
|Direct Unsubsidized Stafford Loans||
3.76% (undergraduate students)
5.31% (graduate students)
$5,500 - $7,500 annually
$20,500 - $40,500 annually
|PLUS loans||6.31%||Up to the cost of attendance minus any other financial aid the child is receiving||Repayment of principal and interest begins 60 days after loan is made. Parents can defer payments while the child is in school.|
|Private student loans||Varies||Varies||Varies|
Subsidized Stafford loans are the single best source of money you can borrow. The interest is picked up by taxpayers while you're in school. New subsidized Stafford loans carry a fixed interest rate starting at 3.76%. Freshman can borrow $5,500 annually; sophomores can borrow $6,500 each year; and juniors and seniors cap out at $7,500.
Once you exhaust your subsidized Stafford stockpile, you want to move on to unsubsidized Stafford loans. New unsubsidized Stafford loans carry a fixed interest rate of 3.76% for undergraduates and 5.31% for graduate students. Similarly, freshman can borrow $5,500 in unsubsidized Stafford loans annually; sophomores can borrow $6,500 each year; and juniors and seniors cap out at $7,500. Graduate students can borrow between $20,500 and $40,500 each year. But I want you to borrow as little as possible in unsubsidized loans because the interest on these loans accumulates while you're in school and you are responsible for the total interest and principal amounts.
As a third option, parents can help their kids by taking out PLUS loans, which are issued at a fixed rate of 6.31%. A parent can borrow up to the cost of attendance.
You apply for federal student loans by visiting FAFSA.ed.gov and completing the Free Application for Federal Student Aid.
Dangers of private student loans
I want you to avoid private student loans at all costs. Back in 2005, the private student loan industry bought off enough politicians to gain the right to do any and all tactics short of causing you bodily harm in their efforts to collect on their money. You have no wiggle room when it comes to repayment options, like you do with federal loans as I explain below. Private student loans typically can't even be dismissed in bankruptcy.
My rules of student loan borrowing
- Never borrow more for a 4-year degree than the entry level salary you expect to earn your first year after receiving that degree.
- Consider doing the first 2 years of your studies at a community college, and then transferring those credits to the school from which you want your degree.
- Never borrow any private student loan money! If a degree exceeds what you can borrow under the federal student loan program, you should either pick a cheaper school or work your way through school.
Ways to pay off your student loans
|Program||Who qualifies?||What do you get?|
|Income-base repayment (IBR)||Federal student loan borrowers with either Direct or FFEL loans||Payment based on their income and family size. IBR will also forgive remaining debt, if any, after 25 years of qualifying payments.|
|Pay As You Earn (PAYE)||All federal student loan borrowers||Caps your monthly payments on federal loans at 10% of your income. In addition, your outstanding debt is forgiven after 20 years of on-time payments.|
|Public Service Loan Forgiveness||Public service workers (see below) with federal Stafford, Grad PLUS, or consolidation loans in the Direct Loan program.||Full loan forgiveness after 10 years of on-time payments.|
|Homesteading||Those who move to live and work in rural Kansas, Niagara Fall, NY, and several other communities. More info here.||It varies, but the forgiveness can be between $3,500 and $5,000 annually for up to 5 years.|
Are you struggling with federal student loan debt now that you're out of school? Fortunately, there is a lot of help for you if you limited your borrowing to federal student loan programs. Unfortunately, there are no similar programs to help with repayment of private student loans, which is partly why I advise against them!
Under the Pay As You Earn repayment (PAYE) program, your monthly payments on federal loans will be capped at 10% of your income. In addition, your outstanding debt is forgiven after 20 years of on-time payments. This new provision applies to federal student loans taken out after October 2007; it does not apply to any private loans. To see if you're eligible for Pay As You Earn, visit the Education Department's website at StudentLoans.gov.
UPDATE: Under an expansion of the PAYE program, those who borrowed before October 2007 will have their federal loans eligible for the same treatment beginning in 2015.
(Note that under the current rules, for federal student loans taken out before October 2007, your payments are capped at 15% of your income and must be paid on time for 25 years to be forgiven. This is part of the income-based repayment program. Visit IBRInfo.org for more info.)
Federal student loan forgiveness options
There are new student loan forgiveness laws that actually benefit a wide range of workers. Public service employees can qualify for full loan forgiveness after making 10 years of monthly payments on their federal student loans. By contrast, private sector employees must make 20-25 years of monthly payments on their federal student loans to have their remaining balance wiped away.
Below is a list of the public service fields that will qualify for loan forgiveness. Ask your loan servicer for complete details about how to take advantage of this generous program:
- Government, military service, emergency management, public safety, law enforcement, public health, public education. (In addition, military personnel on active duty will be able to defer payments on their loans, and service members who are returning to civilian life will be able to defer payments for more than a year.)
- Social work in a public child- or family-service agency; public interest law services, including prosecution or public defense or legal advocacy in low-income communities for a nonprofit organization; public child care; public service for individuals with disabilities; public service for the elderly.
- Public library sciences, school-based library sciences and other school-based services.
- Certain employees at nonprofit groups, as defined by the tax code, and full-time faculty members at tribal colleges or universities.
In addition, this comprehensive list compiles some of the most popular loan forgiveness opportunities. A state-by-state list of loan forgiveness programs has also been compiled by the American Federation of Teachers.
A special path to forgiveness for Corinthian students
Students who attended Corinthian College campuses -- including Everest College, Heald College, and Wyotech campuses across the country -- may be eligible for a special forgiveness process following the company's bankruptcy. Call (855) 279-6207 or visit StudentAid.gov/Corinthian for more info.
A new way to refinance private student loans?
Recently, the private student loan market began opening up with the first real chance of offering refinances that I've seen in about 10 years.
The Cleveland Plain Dealer reports a company called Charter One is advertising an Education Refinance Loan with fixed rates as low as 4.74% and a variable rate of 2.33% above the one-month LIBOR rate.
Those low rates are contigent on two things: A good credit score and a co-signer. So this offer is of no help if you're falling behind on debts and your credit is shot.
You can refinance anywhere from $10,000 to $170,000 in private student loans with 15 or 20-year repayment options. Federal student loans are *not* eligible for this refi offer.
Private student loans should still be avoided at all costs. But this option may help you if you're already stuck in one.
UPDATE: Now there's also a new option for refinancing your private student loans from a consortium of credit unions. Visit CUStudentLoans.com and see what's available. You may save a substantial amount of interest.
A third option would be SoFi.com. They claim to be the largest provider of student loan refinancing, allowing you to refinance both private and federal student loans.