The first bill has arrived, and suddenly, it’s time. Your student is going to college and you’ve got to figure out how to finance it.
When it comes to education financing, a family’s first choice should always be the federal Direct Subsidized and Unsubsidized Loans. These are low-cost, fixed-rate loans (the rate for loans borrowed this year will be 3.76%), and the most that a dependent undergraduate student can borrow is $27,000 over the course of four years. The good news is that this loan is in the student’s name alone and your student will be solely responsible for repayment.
The federal government has just furnished the Class of 2016 with a valuable graduation present—the gift of low interest rates.
Per 2013 legislation, federal student loan interest rates are set for each upcoming school year based upon the 10-year U.S. Treasury Note yield as of June 1st. The final Treasury Note auction prior to June 1st was held on Wednesday, so we now know rates for loans soon-to-be borrowed for the 2016/17 academic year. Happily for student loan borrowers and their families, the news is good!
Over the years, I’ve spoken with many college students and graduates whose greatest wish is a magic wand to make their student loans disappear. While magic wands are a rare commodity in college finance, there does exist a tool for making your loans vanish into thin air. It is called Public Service Loan Forgiveness.
The Public Service Loan Forgiveness (PSLF) program was created by the federal government in 2007 to encourage graduates to fill high need public service positions, or at least to prevent high student loan debt from discouraging graduates to do so. The program forgives remaining loan balances for borrowers who have made ten years of payments on their student loans while working in public service.
A recent New York Times op-ed shared a controversial view on educational loans: it is fine to borrow and never pay them back. A few days later, a rebuttal piece criticized author Lee Siegel and the New York Times for their “deeply irresponsible op-ed.” At College Coach, we are passionate about providing the best advice available with respect to college aid, and we felt we had to provide our own perspective for those families who might have read Siegel’s original piece.
We see no reason why families should take on huge amounts of debt for an undergraduate degree. Contrary to what Siegel assumes, lower and middle class families do not have to borrow huge amounts of money to get a good education. College Coach finance experts work with families every single day to determine how much they can afford and, if borrowing is going to be part of their college financing plan, how to be successful in repayment.
If you graduated this past spring and used student loans as part of your college financing strategy, you likely just received (or will soon receive) your very first student loan bill. For many graduates, this first bill can come as an unwelcome surprise. Sure, you knew you had to pay these loans back someday, but now that that day is here, and you see the size of your expected monthly payment, you may be feeling unprepared to handle repayment. Rest assured: if that monthly payment seems unaffordable based on your current financial circumstances, you do have some options. The government offers a number of repayment plans for your federal education loans, some of which may provide you with some relief:
Part Two: If parents are denied a Parent PLUS loan, what are their options?
Last week, we outlined the basics of the Federal Parent PLUS loan, a great option for many families, but an option that might not be available to all. If you’ve been denied a PLUS loan, you first have the right to appeal the decision by documenting extenuating circumstances (Tweet this Tip). For more information, see https://studentloans.gov/myDirectLoan/whatYouNeed.action?page=credit.
The student’s other parent or stepparent also can apply for the Parent PLUS Loan which will trigger another credit check for the new borrower to determine his or her eligibility. Finally, the original borrower also has the option to utilize an endorser to cosign the loan. The endorser must pass the credit check, and he or she will be responsible for repaying the loan if the borrower fails to make payments.
Part One: What is a Federal Parent PLUS Loan, and how do I get one?
Now that you’ve deposited at a college, it is time to figure out how you are going to pay the bill. One of the many ways parents can help their students pay their college costs is with a Federal Parent PLUS Loan. As the name suggests, this is a loan where the parents are the borrowers. The PLUS Loan is a federal loan that provides borrowers with protections not often found in the private loan market, including several attractive repayment options, fixed interest rates with predictable payments, and deferment and forbearance options during short term hardships.
In recent years, the Parent PLUS loan has offered a fixed interest rate. It is currently based on the Ten-year Treasury Note plus 4.6 percent with a cap of 10.5 percent. The current interest rate is 6.41 percent and will be reset on July 1st for the 2014-2015 school year. Borrowers should borrow for the entire academic year, keeping in mind that they will need to reapply each year. A credit review is done each year because borrowers are not automatically approved for the entire cost of the education.
Yesterday brought breaking news for student loan borrowers: we now know what Federal Direct Loan interest rates will be for the 2014/15 school year! Though rates are officially set for the upcoming academic year based upon the 10-year Treasury Note rate in effect on June 1st, the U.S. Treasury Department just held its last scheduled Treasury Note auction prior to that June 1st deadline, giving us a sneak preview of next year’s rates. For loans disbursed between July 1, 2014 and June 30, 2015, interest rates will be as follows:
Unfortunately for borrowers, these rates represent a 0.8% increase over last year’s rates. See last summer’s blog post regarding how federal education loan interest rates are set, and note that these new rates only apply to loans disbursed during the 2014/15 academic year.