Student Loans & Financial Aid
Financial Assistance for College or Career Training Programs: Student Loans and Financial Aid
When you go to college or train in a career program, you pay the costs now as an investment to increase your earning power in the future. Most people need financial aid to pay for college or career programs. Two-thirds of students take out student loans for their post high school
education. Unfortunately, today’s students have to borrow more than any earlier generation to get a college degree or career training. Currently, student borrowers in the U. S. owe more than $1 trillion in student loan debt. The default rate on these student loans is at an all time high.
So, to make a wise lifetime investment in your financial future, you need to make smart economic choices about financing your education. The kind of financial assistance you get, and the amount and repayment terms of debt you take on for your education, can affect your financial life for many
years. If you make poor choices about financial aid, you could take on overwhelming debt that wipes out the financial benefits of your professional and career training.
It’s important to fully investigate every type of financial assistance you may be eligible to receive. The time for making smart financial aid decisions begins before you enroll in college or a career
program. Fortunately, all the information you need to make smart economic choices about your education is available as long as you take the time to investigate and educate yourself.
Exploring what is available is one of the first and most critical steps in choosing financial aid wisely. Student financial aid sources include the federal government, state programs, individual schools, private lenders, scholarships, and other programs.
Some financial aid offers are scholarships or grants that do not have to be repaid. Take advantage of as much financial aid as you can from grants, scholarships, and other sources that are not loans and do not have to be repaid.
But if, like most students, you have to take out student loans, you want to know what kinds of loans you qualify for. Various kinds of student loans have very different repayment terms, including the rate of interest, the length of time for repayment, the possibility of extending the repayment time or re- financing at a lower interest rate, and the possibility of having the loan forgiven or discharged. Borrow first on loans with the lowest costs and best repayment terms. Only by knowing all of your available options can you be certain you are receiving the most affordable and desirable financial aid package available to you.
If you plan to borrow for education costs by taking out a loan, you have essentially two choices: federal or state government student loans, and private loans. Although government loans are generally preferable and easier to obtain than private loans, be sure you understand that these are debts and therefore the borrowed money must be repaid in the future.
For most borrowers, government student loans are the best option. Federal and state student loans almost always cost less than private student loans and have more protections when it’s time for repayment. When you start to pay back your government loans, the interest rate will be fixed, which will help you predict your payments after graduation. Many types of government loans, with different qualifying criteria, are available. The qualification criteria may include: your family’s financial circumstances, and your credit score. In some cases, your parent must co-sign and be liable on your student loan obligation. In some cases, the federal government will pay the interest on your loans while you are in school; these loans are called subsidized loans.
Private student loans are often available in addition to government loans. The most common private student loans are offered by banks. These loans usually have variable interest rates, which means the interest rates and your payments can go up over time; rates on some private loans have been as high as 16% over the past couple of years. With a variable interest rate loan, it is hard to determine what your future payments will be and when it is time to repay. Private loans don’t offer as many options to reduce or postpone payments.
The U.S. Department of Education provides $150 billion in federal money for grants, loans and work- study each year. To find out what forms of federal assistance you are eligible to receive, you must complete the Free Application for Federal Student Aid (FAFSA). Many individual schools also base their financial aid and scholarships on the FAFSA form, so it is a good idea to complete this
form. You can find federal financial aid information, instructions and the application for FAFSA at https://studentaid.ed.gov. This website is also a good place to begin learning about the various types of student loans and the long term cost differences between loan types.
You can find out about Alaska state financial aid programs at Alaska Commission on Postsecondary Education http://akadvantage.alaska.gov. This website has a loan comparison chart that is also useful in learning about loans.
Don’t be scammed! There are companies that offer, for a fee, to find you financial aid or to help in filing out the FAFSA. Don’t let them take advantage of you. These types of companies may pretend to have an inside track on obtaining financial aid. In reality, they are offering to sell you what you can find for free just as easily from many sources. Furthermore, you know best what is uniquely special about you that may qualify you for a scholarship, such as your special talents, your involvement in community and school activities, your ethnic background. Therefore you are more capable than any company in researching and discovering available scholarships.
Sometimes companies offering to assist you with financial aid are not even legitimate
companies. They are scams to obtain your personal identify information. You should never pay for help in finding financial aid or help in completing the FAFSA, which is a free application and you should never give out any personal information in applying for financial aid unless you are 100% confident you are providing it to a reliable and legitimate entity.
While student loans are a necessary form of financial assistance for most students, they can also be a financial trap in the future. These loans may be easy to get while you are in school, but they must be repaid. It is easy to lose track of the actual amount that you will have to pay in the future.
Today you often hear that the amount of loans students have borrowed to meet the ever-higher costs of college and career programs has skyrocketed. Many students successfully complete their college and career programs only to discover that they cannot afford to pay back their student loans. Instead of celebrating a new phase of independence in their life, they find themselves immediately debt-stressed, forced to make living arrangements and life choices they don’t desire and didn’t anticipate. The burden of excessive student loans can be impossible to overcome. Unlike other overwhelming debt, student loans cannot be relieved through bankruptcy (except under rare circumstances). Sometimes the burden of student debt falls on parents who have been required to co-sign on your student loans.
But if you make informed borrowing and money management decisions while in school, you can avoid a rude economic awakening after you leave school. Limit what you borrow, budget while you are in school, control your expenses, borrow only what you absolutely need to complete your education, and follow the rule of “know before you owe.” This rule is: before you take out any student loan, be sure you know
• the terms of the loan,
• what the interest rate is,
• whether the loan is subsidized or is accruing interest,
• what is the length of the repayment term.
The bottom line is: don’t borrow more than you will be able to pay back. The total amount of the student loan debt you take on while in school is important, but in practical terms what will matter most to you is whether you can make the monthly payment after you finish your education. You need to consider your necessary living expenses as well as your monthly student loan payments. Below is a very rough formula for determining what you can afford. Make this calculation each time you consider borrowing money through a student loan.
For each loan you consider taking, calculate the monthly payment that will be due after you leave school. The loan documents should tell you the monthly payment for that loan, but you should also be sure you calculate for yourself and clearly understand what the total monthly payments will be on all your student loans. The monthly payment for any loan depends not only on the interest rate, but also on the repayment period. For example, the most favorable federal student loan currently available has a fixed interest rate of 4.66% but the repayment period for student loans at this interest rate may be anywhere from 10 to 25 years. Although the interest rate is the same, the length of the repayment period will greatly impact the monthly payment due on the loan. If you borrow $50,000 at 4.66% to be paid over ten years, your monthly payment will be $522.00. If you borrow $50,000 at 4.66% to be paid over twenty five years, the monthly payment will be $282.00.
If you have only government loans, with a fixed interest rate, you should know almost exactly what your total monthly repayment amount will be. If you have any private loan, the interest rate may change over the loan repayment period. Review the terms of the loan and determine the highest interest rate that your loan allows. Assume this highest rate will be the applicable interest rate and calculate the monthly amount on this basis. If you need help to calculate the monthly amount that you will owe, numerous educational websites have tools that will help you.
Then determine if your estimated income will cover all your expenses, including your student loan payments. Compare your expected monthly loan payments and living expenses, such as housing, food, and clothing, to what you reasonably anticipate earning at an entry level position in the career fields for which you are attending school. Research expected salary ranges for entry-level positions that are available in your field. Be realistic and conservative. To get a reasonable estimate of monthly pay, divide estimated annual salary ranges by 12 months. Then deduct at least 17% for mandatory withholdings for social security, Medicare, and taxes, or other anticipated withholdings such as medical insurance. But don’t overestimate your income immediately after you finish school. You may earn more than you estimate, and you are likely to earn more over time. If you earn more, you can make larger payments to pay off your student loans more quickly.
If this formula tells you that the monthly payments on your student debt are too much to be paid along with other necessary living expenses, then don’t borrow more student loans! You need to make different choices about financing your education before you get deeper into student loan debt.
Here is a list of online Money Management Courses, Articles and Tips for Students that can assist you to learn more about budgeting for College or a Career Program.
High School Financial Planning Program—Students Section http://hsfpp.nefe.org/students/index2.cfm?deptid=15
Student Money Management Cash Course http://www.cashcourse.org/unt/
Manage your Money http://mappingyourfuture.org/money/
Financial Literacy for College Students http://www.igrad.com/FinancialLiteracyForCollegeStudents/?fl
Care One Debt Relief Program—Student Money Management Articles http://www.careonecredit.com/knowledge/students.aspx
Young Money Online Magazine http://www.youngmoney.com/
The Dollar Stretcher: Living Frugal http://www.stretcher.com/index.cfm
The Campus Debit Card Trap http://www.studentpirgs.org/reports/sp/campus-debit-card-trap
Financial Literacy Guide http://mappingyourfuture.org/downloads/financialliteracyguide.pdf