4/21/2015 | By Team United
College! It’s the epicenter of higher learning. The beginning to a brighter future. But preparing for college doesn’t just mean brushing up on academic skills. Creating a financial plan – especially when it comes to student loans –is another key to success.
The following tips can help you educate yourself on which student loan works best for your financial situation.
When grants, scholarships and savings aren’t enough to cover the cost of a college education, student loans can be vital to providing the remaining funds. But how do you know which is the best for you?
Federal student loans are often the first step for students looking for financial assistance. Fill out the Free Application for Federal Student Aid (or FAFSA). Without it, you won’t have access to federal student loans – many of which are not based on need or your income. Unlike many private student loans, federal loan interest rates are fixed for the life of the loan and are determined by federal law. In many cases, a cosigner is not needed. The Federal Student Aid website is a great resource to answer many federal loan questions like how much money you are allowed to borrow each year and what types of student loans are available.
Private student loans are meant to fill the gap in financial aid that is left between the Cost of Attendance (COA) and the Federal loans/aid you’ve received. Private loans are not offered through the federal government, so it’s important to look for a loan program from an institution you trust. United Federal Credit Union is pleased to offer Members private education loans through Student Choice.
Private student loans are in the name of the student, but often require a co-signer. They are not guaranteed or subsidized by the government. Instead, they are based on the credit score of the student and/or the credit score of any co-signer they have on the loan. Look for a loan with no origination fees, low interest rates, flexible deferment and repayment options, and an easy application process. You’ll also want to make sure that the loan is certified through the school—which means the school verifies the amount you need to borrow to prevent you from borrowing too much or too little. Funds should be given directly to the school and any difference back to the borrower for books, transportation, technology and other necessities.
When it comes time to repay your student loans, there are many factors to consider before you begin. UFCU’s educational partner, Student Choice, has provided answers to some questions you might be asking as you begin life after college.
How much should I pay? Most borrowers pay their student loans within ten years, but this is by no means the only payment option available. Depending on your financial circumstances, you may want to accelerate your payments, or lengthen the term and concentrate on paying off higher interest debts first. Before you make a decision, first analyze your total financial situation. Make a detailed budget to review your income, expenses, and debt. After you understand how much you have to work with, you can decide which payment plan will work best for you. Many lenders offer a variety of repayment plans for loans in good standing, particularly for federal loans. Perkins loans generally have their own payment arrangements, however. Private loans tend to be difficult when it comes to negotiation, but contact your lender for a possible payment restructure.
1. Accelerated – There are no prepayment penalties for student loans. If you have no other loans with a higher rate of interest, stepping up your payments will save you a lot of money. This is a good option for people who can afford higher payments.
2. Standard – This is the original plan most lenders immediately offer borrowers. To estimate payments, figure about $125 per month for every $10,000 borrowed. Payments are fixed for up to ten years, although payments on variable interest rate loans may increase or decrease over the life of the loan.
3. Graduated – Payments may start out as low as half of what the standard plan may offer (but never below the interest amount), are increased every two to three years, and can be stretched out from 10 to 30 years. This plan may be appropriate for you if your income is low now, but you expect to earn more in the future.
4. Extended – This plan enables the borrower to have fixed monthly payments over a period of 12 to 30 years. Though you will pay more in interest than other plans, it is great for those needing low payments over the long-term. Income Contingent – Income, family size, and loan amount are taken into consideration when determining your monthly payment for this plan. Your financial circumstances are reassessed every year, and as your income rises and falls, so does your payment. If your income is low or unstable, this plan may be right for you.
5. Consolidation – You can lower your monthly payments by combining several loans into one packaged loan and extending the repayment period. Consolidation may be a good option for you if the bulk of your loans are federal (private loans are generally not combined with federal loans), the interest rate is better than what you are currently receiving, and you have at least $7,500 in total eligible loan debt.
There are several options you may want to explore if you find you cannot pay your student loans:
Your loans will be in default if your payments are more than 270 days past due and you haven’t made any overtures towards paying. The consequences of default are severe, and can include aggressive collection tactics, tax refund interception, lawsuits, and non-judicial garnishment of up to 10% of your net wages. You may also be ineligible for deferments, flexible repayment options, grants, and new student loans.
Collection fees will substantially add to the balance – they can be as high as 43%, but are more typically 25%. A default notation will appear on your credit report, and since there is no statute of limitations on student loans, the negative impact may follow you indefinitely.
You have the legal right to get out of default with a one-time only “reasonable and affordable” payment plan. After 12 consecutive payments your loan will be automatically rehabilitated. You must submit a written request to the holder, and include a budget if you offer less than $50 per loan. After six payments you will be eligible for new federal loans or grants, and after 12 your loans come out of default and the notation removed from your credit report. You have the right to be treated fairly during the collection process. Anyone collecting for student loans must comply with the Fair Debt Collection Act. Violators may be fined up to $1,000 per infraction.
As with any major financial decision, it is important to understand all of your options and know your goals and borrowing limits. Federal Student Aid provides a Repayment Estimator that can be a useful tool to help you explore a variety of repayment scenarios.
Federal Student Aid.ed.gov https://studentaid.ed.gov/types
Student Choice http://unitedfcu.studentchoice.org/
UFCU Routing Number: 272484894
Insured by NCUA. Equal Housing Lender – We do business in accordance with the Fair Housing Act and Equal Credit Opportunity Act. NMLS #471962.
If you are using a screen reader or other auxiliary aid and are having trouble using our website, call us at (888) 982-1400 for some help. All products and services available on this website are available at all United Federal Credit Union full-service locations.