Student Loans 2021 Guide – Post COVID-19
Education is the top-most investment of your life in terms of importance. However, this investment doesn’t come cheap. To finance your education, you need to opt for student loans but among all the options which are better for you?
Here we discuss all the aspects of a student loan from how it works, for different lenders to calculating your loan repayments. So by the end of this post, you will have all the clarity you need related to a student loan.
How Do Student Loans Work?
A student loan or Education loan is the money borrowed for higher education, generally post-secondary education. It is given to those students who are applying for accredited colleges or universities.
One reason for this is that the placements of these colleges are better than non-accredited ones and therefore the lend in ensured a repayment. If not ensured, then the risk is comparatively lower.
If covers various expenses as shown in the below graphic:
Normally, the student loan payment is deferred until the student graduates from college. Therefore, till the time the student is studying, they don’t have to pay off the loan.
However, it is a good idea to pay off some portion of the same by working part-time so that you don’t have a lot of accumulated loan balance at the time of graduation. Also, the sooner you pay, the lower is the interest burden.
What Is In-School Interest?
Although, the terms may vary from lender to lender, generally while you are in school, the loan accrues interest. So if the original loan is for $30000, and you accrue interest of $1000 during your school years, then the loan outstanding balance is $31000 once you graduate.
This is one of the reasons, some students try to pay off the interest portion during school or during the grace period so that the post-graduation outstanding loan is not too high.
What Is A Grace Period?
If the first payment of the loan is due after 6 months of graduation, the 6-month period is known as a grace period. This is so because, during this time, the student can either find a job or start working immediately out of college and earn enough to start making payments.
The presence of a grace period totally depends on your loan terms and conditions, so it is generally better to find a lender that gives you the grace period.
At times, the interest rate is higher for the loans with a grace period as compared to that without a grace period. However, that is a trade-off you should take so that you don’t default on your payments in case you don’t get a job right out of college.
Types of Student Loans
There can be several types of loans, however, we have categorized them broadly based on the type of lender.
Federal Student Loans
This is the government loan facility. Here the lender is the US Department of education. The government has four plans offering various student loan facilities:
Direct Subsidized Loans:
The loan is provided only to those undergraduate students who qualify the financial need criteria. In the case of subsidized loans, the government pays some portion of your in-school interest (minimum half of it) and also pay during the grace or the deferment period.
There is a maximum limit on how much you can borrow. The range is $5500 to $12500 and the amount of loan depends on the college year (the higher amount is allowed for later years) and the dependent nature of the borrower (independent borrowers can borrow more).
There is a cap on the maximum amount of loan for all years together.
For more information, please check studentaid.gov to get updated information, definitions, eligibility, etc.
Direct Unsubsidized Loans
The loan is provided to those students of any level of qualification, graduate, professional or undergraduate, but there are no financial need criteria.
Direct PLUS Loans
The loan is provided to students of graduate or professional level and to the parents of undergraduate but dependent students, but there are no financial need criteria.
However, the rate and terms vary based on the credit history of the borrower. Better the credit history, more lenient the terms, and vice versa. This loan only covers those expenses which are not covered by other programs.
Direct Consolidation Loans
Generally, when there are multiple loans, the management is very difficult as each loan has a different rate of interest and a different repayment schedule. So under this plan, all the loans are consolidated and only one single payment is made at a consolidated interest rate.
Private Student Loans
These can be loans from financial institutions such as banks or can be from bodies that are affiliated with the state, non-profit organizations, or even the loans provided by the school itself.
These are dependent on the credit score of the borrower and similar to any other private loan they vary based on several factors.
These factors can be the credit score, the school the borrower is getting into, and other factors that determine the risk involved for the lender.
Based on these parameters, the amount of loan, interest rate, and other terms are specified.
At times the loan is credited to the school and that reduces the payments for tuition, books, and other such fees and then transfers the balance to the student for living and other expenses.
This ensures that the maximum amount of money is used for education purposes.
Sallie Mae Student Loans
Initially, Sallie Mae, like Freddie Mac and Fannie Mae, was a government agency. Therefore, if used to process the federal education loans explained above. However, now it is a publicly-traded company and offers private student loans.
After becoming a private lender, it carried on the servicing and collection operations till 2014, and after that, it created a spin-off called Navient Corporation for its servicing operations.
Navient now services federal loans and also collects them for the Department of Education. So now the student loan operations of Sallie Mae fall under Navient.
Student Loans Without Cosigner
A cosigner is a person who takes the guarantee of the loan repayment. In case the original borrower is not able to repay the loan the cosigner is supposed to repay the loan.
Loans with a cosigner are less risky and therefore attract a lower interest rate. In the case of most private loans, a cosigner is mandatory. In the case of federal loans, this is not the requirement.
There are a few private lenders that allow loans without a cosigner, some of these are Sallie Mae, Ascent, Citizens Bank, Common Bond, Discover, and so on.
However, you need to have a good credit history and meet certain criteria such as the qualification level for which the loan is required among others.
How To Apply For Student Loans?
If you want to apply for federal loans, then you have to fill the FAFSA, which stands for Free Application for Federal Student Aid.
In this application, you answer various questions such as your family income and the number of dependent children in the family among others.
FAFSA evaluates your application and calculates the Expected family contribution. Comparing this amount with the education expenses, the cost of attendance, FAFSA determines how much loan do you need.
This is an annual process so for each year of your education if you require the loan you have to fill the FAFSA. FAFSA is available online.
In addition to this loan, your college may provide you some financial aid out of the Pell Grant or Scholarships.
If you want to apply for private loans, you have to approach the lender and fill the application provided by them. This doesn’t require FAFSA and anyone can apply for this loan whether in need or not. Private loans attract a higher interest rate.
Best Student Loans
Based on our analysis above, the Federal loans are the best, however, they have limits and you might not be able to meet all your expenses from that amount.
You might have to opt for additional private loans, so some good loans for 2020 are:
||FICO of 680|
||Good FICO Score|
|Sallie Mae (Navient)||
||Good FICO Score|
|Education Loan Finance||
||FICO of 680|
||Good FICO Score|
Student Loan Calculator
There are two portions of the student loan. One portion is the loan amount you borrow. This becomes payable only after your education and grace or deferment periods are complete.
So during this period, in some cases, interest might accrue. Let’s take an example.
|Original loan amount||A||15000|
|Rate of interest||r||5%|
|Time for repayment||n||7 Years|
|Time till repayment begins||t||3 Years|
|Payment frequency||f||12 (monthly)|
Step 1 is to calculate the outstanding balance at the end of 3 years from now when repayment actually begins as shown below:
Step 2 is to calculate the monthly loan payment as shown below:
So your monthly payment for 7 years should be $246.24 to pay off the loan completely.
Student Loan Refinance
This is the case of lowering your interest cost for the loan. When interest rates in the economy fall you can approach your lender for refinancing or approach another lender to offer you better terms.
However, in the case of federal loans, refinancing makes you ineligible for certain benefits such as loan forgiveness. So it is a trade-off between lower interest costs and the benefits of federal loans.
Student Loan Deferment
In this case, the borrower postpones the payments to a later date for a maximum of three years. If the deferment allows, then interest might not accrue. This is the case with federally subsidized loans. In this case, the government pays your interest.
However, there might be a case where the interest might still accrue and after the deferment period ends, you still need to pay the original loan plus the accrued interest during the deferment period.
You may approach your lender and fill the deferment application and if you qualify, you can temporarily stop making payments.
Student Loan Forgiveness Program
Not all loans are forgiven. Only federal direct loans or their predecessor, Stafford loans can be forgiven. However, it has become stricter to get your loan forgiven under the Trump Administration.
You may convert your federal loan to an Income-driven repayment program.
Generally, your student loan repayment term is 10 years, however, if your loan amount was very high and your income is lower making your repayment extremely high and unaffordable, you can opt for IDR.
IDR allows you to pay only 10 to 15% of your salary and increases the repayment term to 20 to 25 years. Post that, if some loan is still remaining, it is forgiven.
Student Loan Interest Deduction
Interest up to $2500 or the actual payment, whichever is lesser, can be reduced from the taxable income. Not only can it reduce the taxes you pay, but it can also even move you to a lower tax bracket.
You need to take the loan from an eligible institution for such deduction. You can check the list on the Department of Education’s website.
The eligible loans are for your own education, for your spouse’s education, and for your dependent children’s education. Further, the IRS doesn’t require you to itemize this deduction.
What Happens To Student Loans When You Die?
In the case of federal loans, the loan is discharged on the submission of required proof of death.
So this was our comprehensive guide for student loans, hope it brings a lot of clarity. You may find more information through a financial institution or from the Department of Education website.
Interest rates and rules vary from time to time so it is best to check for updates at the time of your application and repayment.