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What you need to know about Student Loans

What you need to know about Student Loans

August 31, 2023

$31,000 is the maximum amount dependent undergrad students can borrow in federal direct student loans

  • $5,500 in year 1
  • $6,500 in year 2
  • $7,500 each subsequent year until the limit is reached

You must complete the FAFSA to access the Federal Direct Student Loans and the Parent Plus Loans

You must also complete the FAFSA and/or the CSS Profile to receive aid from the schools themselves.  Often times the sticker price is higher than the award letter from the schools, so make sure you are completing the FAFSA and/or the CSS Profile for this reason. 

Understand what your students monthly payments will be after graduation

You wouldn’t rent an apartment or buy a car before fully understanding the monthly payment and whether you could really afford it.  This happens all the time with student loans.  Accepting the loans is easy, but be sure to calculate the future monthly payment.   Zero loans are ideal, but be sure your student does not take out loans greater than the average starting salary for the field they're going into.

You may receive unsubsidized loans at some schools, and subsidized loans at others.

This is because your Expected Family Contribution/Student Aid Index is compared to the total cost of attendance at each school and used to calculate your financial aid award.  All families who complete the FAFSA qualify for the federal direct unsubsidized student loan, but a family’s EFC/SAI must be lower than the total cost of the school to potentially qualify for a subsidized loan. 

Federal subsidized direct loans are a better deal because the government pays the interest on the loan while your student is in school.  Unsubsidized direct loans accrue interest immediately, even though repayment doesn’t begin until 6 months after graduation.

You won’t know the interest rate on your federal loan each year until the summer

When most families receive their financial aid letters in the winter or spring, the interest rates on federal loans have not been set for the subsequent school year.  The new rates are established each year on July 1st and you cannot take out the loan early and lock in the current year rate.

The collateral for the student loan is your students future earnings.

Student loans are not bankruptable.  If your student fails to pay them, the government can garnish their wages, social security and even offset and take their tax refund.  As long as they have the ability to earn, the government will find a way to get paid back.

Stay away from Parent Plus Loans

You are responsible for the loan, not the student.  If your arrangement with your student is for them to pay it and they don’t, you are liable for the debt.  Don’t do that to your future.  On private loans, cosigners are just as responsible as the student.

If your student doesn’t graduate college, you still have to pay back the loans

College is too expensive to simply grow up and “find yourself.”  Be sure your student enters having a purpose and a goal in mind.  Changing schools, majors and careers can have significant consequences financially. 

You can refinance federal student loans.

If your goal is to pay off your loans as quickly as possible, you can refinance federal student loans into private student loans if the interest rates are lower.  If you’re seeking some kind of loan forgiveness using an income-based repayment program, this isn’t the best strategy for you.  Having student loan debt for 10+ years isn’t always the best strategy either.  Loan forgiveness has a terrible track record.  Take control to limit what you’re borrowing and if you do, pay it off as soon as possible.

Conclusion: Plan ahead!

The best way to prepare yourself and your student is to plan ahead.  School choice is just as important as getting a head start saving for those expenses.  Check out our early and late state College Planning services to help set your student up for success!