Breaking Down Student Loan Options
The cost of education has increased dramatically over the past few decades, often forcing students and parents to consider taking out loans to pay for tuition, fees and room and board. While grants and scholarships are available, they may not cover the cost of a student’s final bill.
Fortunately, there are several different types of student loan programs available. The eligibility for these programs, as well as loan terms, differ by program, so it’s important that students, and their families, do some research before making the decision to borrow.
Student Loan Types
Federal Direct Loans
Previously known as “Stafford Loans,” the Direct Loans program provides loans to students based on need. There is no credit check required to apply for a direct loan
There are two subtypes of direct loans available: Subsidized and unsubsidized. The government pays the accruing interests on a subsidized loan while the student is still in school. Unsubsidized loans begin to accrue interest as soon as they are disbursed.
One major advantage to choosing federal direct loans is that there are several programs that can help borrowers manage repayment, particularly if the borrower is unemployed or doesn’t make a lot of money. These include the ability to defer repayment as well as income-based repayment plans that limit the amount of monthly payments to a percentage of the borrower’s income.
Parent PLUS Loans
This is a federal student loan program that allows parents to borrow money to pay for their child’s education. Some parents choose a PLUS loan if standard loans, grants and scholarships don’t cover the cost of school expenses.
Unlike Direct Student Loans, repayment on PLUS loans begins immediately after they are issued. In addition, there are credit standards for parents who wish to borrow through this program.
One issue with the PLUS program is that the parents, not the student, are responsible for repaying the loan. Given that many parents of college students are older, careful financial planning is necessary to ensure that loan payments will not interfere with being able to enjoy retirement.
In addition, if a student drops out of school or does not pursue the career path that he or she had planned, the parents are still responsible for paying off this debt. This could create family tensions that damage the parent-child relationship.
Private loans are an option for someone who has to take out a significant amount of debt to finance an expensive education, such as law or medical school. Loan limits, interest rates and credit qualifications vary by lender.
Students, and their parents, should be cautious about this option. Private loans often don’t have the borrower protections that government programs offer. If a student can’t get a good job after graduation, he or she may not be able to negotiate a deferment or a lower monthly payment.
Parents should be particularly cautious about co-signing private student loans, as lenders are not required to cancel the loan if the student dies or becomes disabled and unable to make payments.
Student Loans and Bankruptcy
One final consideration for those considering student loans is the difficulty of discharging them in bankruptcy. The U.S. Bankruptcy Code makes it very difficult to discharge student loans in a bankruptcy. The burden is on the borrower to show that he or she would experience undue hardship if forced to continue making payments on the loan. Absent being able to offer such proof, the borrower may remain on the hook for the balance of his or her loans.
While student loans can be an investment in one’s future, starting out a new career with debt can be a significant challenge. Carefully evaluating one’s needs and financial aid options is an important step in making good choices about college finances.