Student Loan Advice from a Personal and Family Finance Specialist

Carrie Johnson, Extension Specialist, on how to find the right student loan

Students loan providers are groups or organizations that finance student education under the condition that they can be repaid later. In 2019, 43 million Americans had federal student loan debt. They make up the majority of student loans. If federal aid is not sufficient to cover tuition costs, private loans may be used to make up the difference. However, these loans have their own requirements and should only be used after considering all other options.

Investopedia spoke only with Carrie Johnson (AFC(r), Accredited Financial Counselor) and Associate Professor at North Dakota State University about student loans. We discussed the different types and differences between providers as well as common misconceptions. Below is the edited conversation.

How to apply for a student loan

Investopedia: What’s the FAFSA? Does it matter when you apply for it? What is the difference between the FAFSA Profile and the CSS Profile?

Johnson: The FAFSA (Free Application for Federal Student Aid) is the form families must complete to be eligible for federal student aid. FAFSA is used to collect student income and asset information. If the student is a dependent student, it also collects income and assets from the parents.

This information is used to calculate the Expected Family Contribution (EFC). The EFC is used to determine which types of federal student aid (grants or work-study) a student is eligible for.

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FAFSA records the income tax information for the previous, preceding year. For the school year 2021-2022 for example, tax information from 2019 is used. Families don’t need to fill out the FAFSA before the school’s priority date in order to make any corrections later. Each institution has its priority date. This date is used to determine which types of aid will be awarded.

A school might set a date that only those who have completed the FAFSA before that date can receive the Supplemental Educational Opportunity Grant (SEOG). Although this grant is federal, each school offering it can determine how it is distributed.

The FAFSA, as mentioned before, is used to determine eligibility for federal student assistance. Some institutions use the CSS Profile to determine whether a student is eligible for non-federal financial aid. The FAFSA can be obtained through the Department of Education. However, the CSS Profile can only be used by approximately 400 institutions. Each year, the CSS Profile is expensive to complete.

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Understanding Student Loans

Investopedia: Student Loans are well-known for being expensive over time. Why do you believe this industry is still the main source of funding higher education for many?

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Johnson: The average annual cost of attendance at a four-year public university was $20,598 according to the National Center for Education Statistics. This is higher than the cost for private non-profit and for-profit universities. This includes undergraduate tuition, fees and room and board.

If you divide that number by 4, you will end up with $82,392 for an undergraduate degree. This is assuming you complete your degree in four years. Because many families don’t have the funds to pay for college outright, student loans can be used to help fund it.

Investopedia: What are the differences in loans for graduate and undergraduate students? Is it necessary to obtain a loan each year?

Johnson: Let me start by answering the question about taking out new money tree payday loan every year. You will also need to fill out a Free Application for Federal Student Aid (FAFSA), if you use federal student loans.

There are a few differences between undergraduate and graduate student loans for federal loans. First, the amount a student is eligible to borrow is different. Students are entitled to a maximum amount in Direct Student Loans each year based on their grade. A graduate student may receive up to $20,000.500 annually, while first-year dependent students can get $5,500.

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Only graduate students are eligible for unsubsidized direct brother loan. This means that interest starts accruing from the moment the loan is paid. Students in undergrad are eligible for subsidized direct loans (0% interest, while at least half-time student), if their FAFSA information shows that they have financial need.

A Direct PLUS Loan for graduate student, also known as a grad PLUS, gives students the opportunity to borrow federal loans. Federal student loans can be used to fund graduate students up to the cost of their attendance. Undergraduate students cannot borrow federal loans beyond what their parents have approved.

Investopedia: What are the differences, if any? Should a student get a loan in his/her own name, or have their parents take out the loan for them?

Johnson: Students are responsible for repaying student loans. Federal loans don’t require a cosigner. A cosigner is not required for federal loans. Students can borrow a private student loan, which is a loan that is offered by a bank or credit union. A cosigner is most likely required. The cosigner is responsible for paying the loan back if the borrower defaults. After making regular payments, some lenders offer cosigner releases.

Parent loans are 100% the responsibility of the parent. Even if the parent borrows federal parent PLUS loans, the loan remains in the parent’s hands and cannot be transferred.

Investopedia: What is the difference between student loan debt and other types of debt? What does it mean to have a student loan that is unsubsidized or subsidized?

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Johnson: Student loan debt is not considered “good debt” like unsecured loans and credit cards. There is both good and bad debt. Creditors will view it differently because you are funding education and building your personal capital. This can help you have a better job and possibly earn more.

It is harder to discharge student loan debt in bankruptcy. In recent months, however, this has been less common.

Subsidized student loan are loans that don’t accrue interest while the borrower is enrolled at minimum half-time. Unsubsidized student loans start accruing interest as soon as they are disbursed (released) to the borrower.

Investopedia: What is the difference between scholarships, grants, student loans?

Johnson: Students must repay student loans. They are sometimes called self-help financial assistance. Grants and scholarships, on the other hand, are gift aid since they don’t need to be repaid. Most grants are based on financial need. Scholarships are often merit-based, but some can also be based upon other factors like athletic ability or hobbies.

Find the right student loan provider

Investopedia: What is the difference between private and federal student loan providers? Which is better?

Johnson: Federal student loans can be guaranteed by the Department of Education. The borrower’s financial situation and grade determine the amount and type of unsubsidized or subsidized loans. The student loan servicer assigned to the borrower is someone they will work with once they have finished school or dropped below half-time in order to repay the loan. The federal government sets annual interest rates.

Private student loans can be obtained through any financial institution, company or state agency that offers student loans. Each institution sets the fees and interest, which can vary greatly. The interest rate is variable rather than fixed. This means that the rate may change dramatically throughout the term of the loan. Before deciding on which loan to take out, it is crucial that borrowers do their research and compare rates and fees. A cosigner is usually required for private student loans.

There are many repayment benefits to federal student loans. There are forgiveness options available for certain occupations and in the case of disability. There are several options for suspending payments for borrowers who are having difficulty paying their loans. These benefits are not available for private student loans. In many cases, the cosigner will be responsible for any remaining loan balances if the borrower dies.

Before applying for a private loan, it is best to exhaust all federal student loan options.

Investopedia: What should people look out for when looking for private student loans providers? Is one situation more favorable than the other?

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Johnson: There are a few things to consider when shopping for private student loans. The two most important financial-related items you should compare are interest rates and origination charges. A loan with a cosigner release is possible after a certain number of on-time payments. You may also prefer a loan with fixed interest rates to a variable rate. It is important to carefully read the loan information before making a decision.

Investopedia – Are there circumstances in which it might be a good idea to avoid taking out a student loan.

Johnson: Absolutely. Johnson: Absolutely. A student can also choose to accept a portion of the loan if they are offered more than what is required by their award letter.

Assistance in Paying Off Your Loans

Investopedia: What resources can you use to help repay your student loans?

Johnson: Contact the lender or servicer immediately if you are having trouble repaying any type of debt. It is important to not ignore the problem. Federal student loans can be deferred or forbeared by the borrower. These enable monthly payments to temporarily be delayed or reduced.

Investopedia: Can a student consolidate his or her loans after graduating? Can student loans be forgiven

Johnson: Consolidating student loans can help you consolidate all student loans that were borrowed in college. This should be done carefully so that you don’t lose repayment rights or forgiveness options. Consolidating your loan means that all your loans are paid off and a new loan is created. All terms of your loan will be changed.

First, it is not a good idea to combine federal student loans with private student loans into one loan. Private loans cannot be combined with a Direct Consolidation loan. To do this, a borrower will need to use a private consolidator student loan. This would convert the federal loan into an individual loan with a new lender. You will need two consolidation loans if you wish to consolidate both your federal student loans and private student loans.

Federal student loans may be forgiven, cancelled, or discharged in many situations, including Teacher Loan Forgiveness and Public Service Loan Forgiveness. Perkins Loan Cancellation and Discharge. Total and permanent disability discharge. Each of these “programs” has its own criteria that the borrower must fulfill.

Public Service Loan Forgiveness (PSLF) is one example. This is only for Direct Loans (including Consolidation Loans), and it’s only for borrowers who have an income-driven repayment program, are employed by a qualified employer, and have made 120 regular payments, while working full-time.