Now is the time of year when students are heading to college. In past blogs, we have talked about ways to save for college and ways to minimize the cost of college. If you find yourself in the situation where you need to use loans to help pay for your college, this post may help you.

As a college student (or parent of a college student), you have access to two types of student loans:

  • Federal student loans (FSLs) are issued by the federal government. Interest is subsidized or unsubsidized.
    • Subsidized loans do not accrue interest while the student is in school.
    • Unsubsidized loans accrue interest while the student is in school. If the interest is not paid, it is added to the amount borrowed and increases the amount the student owes.
  • Private student loans are issued by financial institutions such as banks and credit unions.

When considering which type of student loan to use, consider the following:

How much can you borrow?

  • For FSLs, the amount you can borrow is based on the student’s financial need.
  • For private loans, the amount you can borrow is based on the student’s (or parent’s) credit rating.
  • If possible, strive to borrow less than what is allowed. Borrow enough to pay for the amount of tuition, fees and books that is not already paid through scholarship money. Work part-time or use a work/study program to earn enough income to pay your living expenses. This takes work and commitment yet you will thank yourself later when you realize how much less you will owe when you graduate.

What is the interest rate?

  • In most situations, the interest rate on FSLs is lower than private loans.
  • Interest rate on private loans is usually higher but can be lower if the student and the co-signer (usually the parent) have great credit ratings.

What are the repayment terms?

  • FSL repayment terms are more flexible and have relief options available is the student has a financial setback after graduation.
  • The terms for private student loans are set by the lender and, in most cases, cannot be changed.
  • Be sure to read the terms and the promissory note carefully whether you are using private student loans or FSLs. If you don’t understand anything, ask questions or ask an accountant or attorney to review the paperwork for you before you sign it.

What happens if the student or the co-signer dies before the loan is repaid?

  • In most cases with FSLs, if the student dies, the loan is forgiven.
  • With some private student loans, the loan becomes immediately due in full if either the student or the co-signer dies.

Whether you are applying for a federal student loan or a private student loan, experts suggest you plan the loan backwards.

  • What are the job prospects for the student after graduation?
  • What will the student be earning when he/she graduates from college?
  • What is the size of payment the student will be able to make after graduation?
  • Will the student need to live with Mom and Dad until the student loans are paid?
  • Keep track of the total amount you are borrowing, the interest rates, and the repayment terms so that you don’t borrow more than you can afford to repay.

Need more information or help? Contact us [email protected] or 402-502-0250.

Some information for this article came from “What to Know Before You Take Out a Student Loan” by James Sullivan, CPA/PFS, and Melissa Towell, Journal of Accountancy, July 2016.

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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