Student Loan Stuff

Parents ask me about student loan options this time of year (June), so I thought I’d lay them out here.

First comment:  god, I HATE student loans! For personal reasons (I struggled with 100K-plus of my own debt between Wesleyan University and St. John’s Law School), which still affects me today).

Putting my psychological scars aside (thanks for the fleeting though, however), student loans are a huge, growing problem:  we passed the Trillion dollar mark and default rates are on the rise.

But if you need to borrow, here’s a brief, non-comprehensive low down:

  • Subsidized Direct (Stafford) Loan:  from the college financial aid office, but funds are from the Department of Education.
    • The rate is currently fixed at 3.4%, but could change in July depending on how congress deals with it – this loan’s rate is scheduled to rise to 6.8%.  Also:
    • loan amounts are relatively small  – up to $5,500 per year for the freshman year but increase each year;  and
    • the government pays (“subsidizes”) the interest until six months after graduation.
  • Unsubsidized Direct (Stafford) Loan:  also awarded by the financial aid office, also funds from the Department of Education.
    • 6.8%, interest rate is fixed.
    • Accrues from Day 1 (the Dep’t of Ed. does not not pay the interest).
    • You fill out the FAFSA (Free Application for Federal Student Aid) to apply for both the Subsidized and Unsubsidized Direct Loans.
    • Loan amount is also $5,500.
  • PLUS Loan:  a parent, not student, loan (Parent Loan for Undergraduate Students).  Also from the Department of Education.
    • Interest rate is 7.9%, and
    • you pay a 4% (!) “origination” fee.
    • You can borrow up to the entire Cost of Attendance of the college, less any financial aid received.
    • There are a variety of repayment options, but interest accrues upon disbursement (unlike the Subsidized Direct Loan).
    • You must qualify, but it’s much easier than qualifying for a mortgage, for example.
  • Private student loans:  These are fewer and farrer (I know it’s not a real word, but it should be!) between than pre-2008, but there are approximately 25 or so lenders out there.  Comments:
    • Expect to co-sign if you’re a parent.
    • Rates are variable, meaning not only that they can go up or down, but also that rates vary based on credit.
    • Discover, Sallie Mae and others are still lending. Check with your local bank or credit union, if applicable.

Last note on all of the above:  you cannot discharge a student loan in bankruptcy, which, hopefully, won’t be an issue for you but I predict that it will be for tens of thousands.  Look for this feature to change at some point.

Here’s how to reduce, or even eliminate, dependence on student loans: a recorded version of a lecture I stopped giving sometime in late 2012  – no charge.