If you or a friend suffer from anxiety (student loans), then the following article is for you. Enjoy
In addition to my being a marriage and family therapist, I also moonlight as a writer for a variety of organizations, including MastersDegree.org. When they company was sending me a lot of assignments, I seized upon the opportunity to learn more about student loans (#gradschoolproblems).
The “Student Loan Debt Crisis”, as it has been named by the media, probably affects at least every single person everywhere. Or not, but whatever, student loans can be a real source of anxiety- for parents, for students, and especially for recent graduates. But what to do with all of the anxiety? You can’t pay off student loans over night, so it can be the sort of stress the lingers. One of my favorite ways to deal with anxiety is to DO SOMETHING. Once you’ve done everything in your power to deal with an anxiety-provoking problem, your anxiety should have decreased to a more manageable level.
I consider the following information very useful for decreasing student loan anxiety. Arm yourself with knowledge, apply that new knowledge to those pesky student loans, then go get yourself some anxiety decreasing cardio (be creative):
Everything You Need to Know About Student Loans
By Brittany Steffen, MS, LMFTA
As you already know, getting an advanced degree can be quite expensive. What with tuition, textbooks, and the added cost of being a full-time or part-time student, bills can add up quickly. Student loans are a great way to finance your education—after scholarships, grants, fellowships, school financial aid, employee tuition reimbursement, and family assistance have all been explored. Getting a student loan requires careful research, an application process, and an investigation into future payment plans. Need to know information about student loans includes the types of student loans available, the differences between these types, and options for repayment.
Federal Student Loans, Parent Loans, and Private Loans
There are three major categories of loans that you should be aware of, each with it’s own advantages and disadvantages. All students who are using loans should first fill out the FAFSA (fafsa.gov). This application may qualify you for grants, work-study, and other financial aid. Additionally, you’ll receive an offer of federal student loans, and you’ll be able to compare your offer to your actual education costs (tuition, textbooks, and any living expenses you can’t afford). This may leave you with a balance, and you can explore options for parent loans or private loans.
The first category of student loans, federal student loans, refers to loans offered to students by the federal government. This includes two kinds of Stafford Loans, Federal Family Education Loan Program (or FFELP, privately loaned by banks or credit unions) and the Federal Direct Student Loan Program (or FDSLP, direct loans from the U.S. government), and a school awarded, financial need based loan called the Perkins Loan.
Stafford Loans are either subsidized, meaning the interest your loan accrues during school is paid (subsidized) by the government, or unsubsidized, which means that you can either pay the interest your loans earn during school, or have those interest payments deferred (a scheduled delay in required payments) until you’ve graduated. After graduation, Stafford Loans have a 6-month “grace period”, during which the graduate is not required to pay on their loans. A Perkins Loan is the absolute best student loan option, as it is both subsidized during school, and for the 9-month grace period after.
Parent Loans (or PLUS loans) are a type of loan available to the parents of dependent students. The parent/applicant of a PLUS loan is held financially responsible for the loan’s repayment—even if the student has agreed to repay the loan. PLUS Loans are not subsidized during school, and repayment begins 60 days after the funds are disbursed. As of 2006, graduate students are also eligible to borrow money through the PLUS loan program. Both parents and graduate students who take out a PLUS loan can have their payments deferred until graduation. However, graduate students do not have the option of a six-month grace period; parents do have this option if the student graduates or drops below what the PLUS Loan considers “full-time enrollment”. Turn to PLUS Loans when you’ve borrowed what you can from Stafford/Perkins Loans, and have parents who are willing and able to financially assist you. PLUS Loans also charge a fee of 4% per disbursement check—which means that you’ll get 96% of the total amount of the loan you apply for.
Private Loans, also known as Alternative Education Loans, are the last type of loans to turn to on your loan journey. When federal loans aren’t enough to cover the cost of your education, or if you need a more flexible repayment plan than a PLUS Loan can offer, private loans are another option. Private lenders offer these loans and eligibility (and the interest rates offered) often depends on the applicant’s credit score. You should apply for a private loan with a parent as a cosigner to get the lowest interest rate. Private loans are not eligible for many of the federally supported incentive programs, cannot be consolidated (see below) with federal student loans, and usually come with disbursement fees in addition to interest rates.
If you take out student loans, you’re going to be held responsible for repaying the full amount of the loan as well as interest. Interest is a fee paid by the borrower to the moneylender. It is the price you pay for the convenience of spending money that you have not yet earned. Interest begins accruing as soon as your loans are dispersed, but as mentioned above, interest can be subsidized (interest is paid by the government while you’re a student and during your grace period) or unsubsidized (interest accumulates while you’re in school).
Your lender will quote you an interest rate during your loan application process. Federal subsidized and unsubsidized graduate student loans, PLUS loans, and private loans come in both fixed and variable rate forms. The interest on a fixed loan will not change—the interest rate you sign with is what you’ll use to calculate your repayment. With a variable loan, you may start with a low interest rate and end up paying a higher rate later, depending on the changes in an index rate (such as the U.S. Prime Rate). There are pros and cons to each loan—you may pay less (or more) depending on how your variable loan fluctuates over the years, or you may chose a fixed rate so you can rely on knowing what your payment will be every month. Either way, find a loan with the lowest interest rate possible, chose subsidized over unsubsidized loans, and always choose federal over private loans.
Calculating your monthly interest payment (the portion of your monthly payment that is going towards your loan interest, rather than your initial loan) can be complicated. Your interest rate represents the percentage of the total loan amount that you’ll owe per year. For example, if your interest rate is 6.8% and your federal unsubsidized loan is for $5,000, you’ll owe $340 in interest a year starting from when your loans were disbursed. While you’re in school, interest will accrue on your loan balance—even though you are not yet required to make payments. After 2 years of school and your 6-month grace period, your $5,000 loan would have accrued $850 in interest. If you don’t pay that interest before your regular payments begin, your interest will capitalize, or be added to the loan balance. Translation—your loan balance would become $5,850 and your yearly interest payment would be based of your new total, causing future interest payments to be higher.
Repayment Options (not for Private Loans)
When required repayment begins depends on your loan. It can be when your loan is disbursed, 60 days after your loan is disbursed (PLUS loans), or after graduation and a 6 or 9-month grace period (most federal loans). Your lender will generally be in touch with you to let you know when your repayment will begin—but make sure your lender has your up to date contact information at all times. Once repayment is upon you, you’ll need to calculate how much you can afford to pay, versus how much you’re required to pay monthly. If you can’t make your monthly payment as is, it’s time to look at your many options. Note that private loans are generally not eligible for alternative repayment plans.
Starting from the standard repayment plan, or fixed monthly payments over a period of up to 10 years for direct loans, federal loans, and PLUS loans, your next option is a graduated repayment plan. For the direct/federal and PLUS borrowers, you have the option to make lower payments at first, with increasingly higher payments over a period of up to 10 years. You’ll end up paying more for your loan than you would under a standard repayment plan, but you’ll have lower payments as you establish yourself in your career. If a graduated plan does not meet your needs, and your direct loans are more than $30,000 or your FEELP loans (see federal student loans) are more than $30,000, you can apply for an extended repayment plan. This plan increases your pay period, up to 25 years, and offers lower fixed or graduated payments. Again, you will pay more over time—the longer you take to repay your loan, the more interest you’ll accumulate and pay for.
If you are a borrower experiencing financial hardship—and can prove it to your lender, and meet their requirements—you may be eligible for an income-based repayment (IRB) plan. Direct/federal loans, PLUS loans taken out by students, and consolidation loans made to students are eligible for IRB. This plan is very flexible—your monthly payments will be limited to 15% of your discretionary (the difference between your household poverty guideline and your adjusted gross earnings) income for up to 25 years, with payments changing as your income does. After making “the equivalent” of 25 years of monthly payments, your outstanding loan balance is forgiven. For IRB eligible borrowers after October 1, 2007, who need a lower payment, pay as you earn repayment offers the same benefits with a 10% monthly discretionary income, up to 20 years. As always, you’ll pay more on interest with a longer repayment plan.
Your last two options are income-contingent repayment and income-sensitive repayment. The former applies to direct, PLUS loans made to students, and direct consolidation loans. Payments are calculated each year based on your adjusted gross income, family size, and loan total, with payment changing as income changes, for up to 25 years, after which loans are forgiven. The latter plan applies to Stafford loans, FEEL PLUS loans, and FEELP consolidation loans, with monthly payment based on annual income, payments changing with changes in income, for up to 10 years.
If you have multiple student loans from a variety of loan companies, you might want to consider consolidating your loans to simplify your monthly payment. As with everything loan related, there are pros and cons to consolidation. Most federal loans are eligible for consolidation—including subsidized and unsubsidized federal loans, Stafford loans, PLUS loans, FFELP loans, supplemental student loans, Perkins loans, and Nursing or Health Education Assistance loans. Private loans are not eligible, PLUS loans made to parents cannot be transferred to the student for consolidation, and you cannot consolidate any loans that are currently in default (when you’ve failed to meet the terms of your loan repayment).
Loan consolidation not only simplifies loan repayment, by bundling your loans together for a combined monthly payment option, it can lower monthly payments by giving you up to 30 years to repay your loan at a fixed interest rate. Note that if you have a variable interest rate loan, your interest rate will switch to a fixed rate through consolidation. By increasing the length of your repayment period, you’re increasing the total amount of interest that you’ll pay overall, unless you’re able to consistently pay more than your monthly rate. But consider consolidation carefully—you will lose some borrower benefits offered with your original loans when you consolidate. However, you’ll also have access to repayment plans specific to consolidated loans. Overall, consolidation is a great option for individuals with a variety of federal loans, who want a simple monthly payment, or who want lower monthly payments on their loans. You can apply for loan consolidation online at LoanConsolidation.ed.gov.
For those who qualify, deferment is an option that allows borrowers to temporarily delay repayment on your loan’s principal amount and accruing interest. While your loan is in deferment, you won’t need to make payments. Depending on the type of loan you have (Perkins, direct subsidized, or subsidized Stafford loans), while your loan is in deferment, the federal government will actually pay the loan’s interest for you. For all other types of loans, your loan will continue to accrue interest, but you will not be required to make interest payments until after your loan is out of deferment.
Eligibility for deferment depends on your finances, employment, and status as a student. If you are unemployed or unable to find full-time employment for up to 3 years, experiencing economic hardship (determined by your lenders requirements), or in the Peace Corps Service, then your direct, FEELP, and Perkins loans will qualify for deferment. For active duty military service or reserves service called to active duty while enrolled in school at least part-time, during either the 13 months following the conclusion of qualifying active duty or until you’ve returned to enrollment as a student at least part-time (which ever happens first) your (direct, FEELP, and Perkins) federal loans are eligible for deferment. For students enrolled at least part-time in college or technical school, or during your graduate fellowship program or rehabilitation program, your direct, FEELP, and Perkins loans are eligible for deferment. Lastly, if you have a direct loan or FEELP loan that was disbursed before July 1st, 1993, you may be eligible for deferments if you work as a teacher in a shortage area, in public service, are a working mother or have applied for parental leave, or temporary disability. See your lender for more specific options.
Deferment is something that needs to be requested from your lender or the school you were attending when you received your loan. If you’re requesting deferment while you’re enrolled in school at least part-time, you can see your school’s office of financial aid for additional information. Deferment is not indefinite, and may only be available as an option for a specific amount of time. If you can make your payments, safe your deferment option until you really need it.
For borrowers who cannot make their monthly scheduled payment but don’t meet the requirements for a deferment, your lender may offer you a forbearance option. Forbearance allows you to stop making payments or reduce your monthly payment for a period of time up to 1 year. During this time period, your loans will continue to accrue interest. There are two different types of forbearance—discretionary, or at your lender’s discretion if the borrower reports financial hardship or illness, and mandatory, or if the borrower meets eligibility requirements and requests forbearance for any of the following reasons: the individual is in a medical or dental residency program, serving in a national service position that they’ve received an award for, a member of the active duty National Guard, or qualified for teacher loan forgiveness. Additionally, if your total monthly repayment for all of your student loans is over 20% more of your total monthly gross income, you may qualify for forbearance.