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4 Things Parents Must Keep In Mind About Student Loans

Every year has seen tuition costs for college and university rise – the average cost of private intuitions of higher education reached as high as $40,000 in 2013 and 2014, and the cost will only go up as time goes on. The increase is estimated at around 3%-4% every year, outpacing wage growth and inflation – which means that many families don’t have a choice but to take out student loans in order to make up all of the costs.

If you’re a parent sending your child to an institution of higher learning and you’re looking at taking out student loans, it’s important for you to know the ins and the outs of the college loan system – you don’t want to be caught off guard, so you should know about student loans.

Know About Student Loans

As A Co-Signer, You Are Always Responsible to Know About Student Loans

Some recent stories of parents co-signing for student loans have attracted some media attention – and one such story is that of the Mason family. The parents of Lisa Mason co-signed for nearly $100,000 of student loans to cover the cost of nursing school – and then tragedy struck. Lisa Mason died of liver failure at 27 years old, and the Mason parents were suddenly targets of lenders looking for repayment of the loans regardless of the tragedy. Because the Masons didn’t know about student loans, they suffered afterward.

While some of the lenders reduced their interest rates in light of the media attention the story found, a lot of people still don’t quite realize how dangerous co-signing can be. They’re liable, no matter what happens to the student – and even if the student remains in good health, the co-signer will be on the list when the time comes to pay.

Who Borrows the Money Is Important To Remember

When it comes to financial aid the calculations assume the burden of paying the loans is settled on two groups – the student and also the parents will make contributions to paying off the debt, and both are taken into account when it comes to the type of financial aid that can appear. Just like co-signing for private loans, it’s important to be accurate with who’s borrowing what for federal loans.

This flexibility can get you some better terms when it comes to interest rates and repayment. PLUS loans for parents can see fixed interest rates and delayed repayments when needed – but you need to ask yourself if you, as a parent, can repay the loans in worst-case scenarios. The more debt you take in your name, the more trouble you might have if things don’t play out well – just another thing that’s important to know about student loans.

Learn About Forgiveness Terms

The terms of forgiveness – if you have to pay back the loans – depends on what the type of loan is. Federal loans generally have a generous or kind set f forgiveness terms. Tragedies can see the loans forgiven so that you don’t have to pay back, if your child takes a public-service job (like teaching) it can forgive the loans over time, and if the school closes down for foreclosure it can result in you not having to pay the loans back.

Private loans, on the other hand, are much stricter. Lenders vary from one to the next on how they offer forgiveness terms if they do – and while they will take into mind how likely it is they’ll be paid back over a shorter or longer period of time (which can work out for you if you tell them, and get you on income-based repayment or a longer period to pay everything back), not many will give you outright forgiveness. Federal loans are better for you than private loans – but they can’t cover everything. If you have to take a private loan, make sure you know about student loans and every last detail of the loan contract and try to keep it in mind at all times when dealing with paying back your loans.

No Debt Is the Best Kind of Debt

It’s obvious – you’d rather have no loans to repay than some loans. It’s loan debt, and it can stack up from interest or generally hurt your credit score as time goes on. There’s a few ways to push toward this kind of goal, and one of them is to (while your child is still young – start as soon as you can) set up a college education fund near the start of the process and let it build up over time. Even a small amount every year can cut back the amount of tuition you will have to pay and make sure you have an easier time paying the loans back.

Just because you know about student loans it doesn’t mean you will have an easy time paying everything off – but being informed on exactly what each loan means can help you in the future of a tragedy or setback occurs and make sure you avoid the financial ruin that can from defaulted student loans.

Alternate Ways to Handle Student Loan Debt

Parent’s that have one or more children in college will have accumulated student loan debt. Furthermore if the child is placed on college suspension or graduating will owe on the average $30,000 in student loan debt.  In fact those graduating this year the debt may even be more simply because Congress was unable to reach a decision regarding the interest rates on government issued student loans.  The interest rates just doubled from the 3.4% to 6.8% for federal student aid which includes both subsidized and unsubsidized loans.

Handle Student Loan Debt

This of course does not apply to a child taking out or the parent signing a promissory note to obtain a loan through a financial institution. At the same time young adults between the ages of 19 to 28 have to worry about the professional job market. The job market for many of these college graduates will be bleak to say the least. Since they will be up against adults that have lost their job because of outsourcing or the business has foreclosed do to the economy. These adults have experience along with high education will most like get the job before the new graduate from college.

Of course if the bachelor degree is in the following fields of science, technology, medical, research, STEMS or mathematics then finding a job is slightly easier compared to other saturated fields. Unfortunately for these individual’s it might take months to years before they can find employment in their field of study. While the graduate is continuing to look for employment and still not working then how will they handle student loan debt?

Ways to Qualify for Repaying Student Loans

Consequently parents, graduates or young adults have two options when it comes to handling student loan debt and the interest of loans that equaling $30,000 or more. Parents and young adults struggling with student loan payments may qualify a deferment or make payments on the interest during forbearance. Many of the deferments are not done automatically so the individual would need to submit a request to the financial institution that services the loan. In addition the person would also need to contact the college or university financial aid office. If at any time the student is in college part-time, in grad school or a career/technical school, along with not being able to find full-time employment or unemployed are all ways a person may qualify for a deferment from the loan. Another way to have a student loan deferred if they have experience economic hardship do to being away for military service, natural disaster and being in the Peace Corps. There are several websites that have information available about getting a loan deferment. One of the websites that is important to check with at the beginning of each New Year is the Federal Financial Aid or FAFSA at the www.FAFSA.GOV.  The application should be completed no later than the first of March each year or as soon as all the prior year’s tax information is available to them.

Two Types of Forbearance

  • Mandatory is for students who do not qualify for a deferment.  However it can be requested if the student is in a dental/medical internship, medical residency program, a national service program, providing teaching service, or have been activated by the governor as a member of the National Guard. The other way a person may receive mandatory forbearance if the student loan payments each moth totals more than 20% or more of their gross income.
  • Discretionary is only granted by the financial institution that gave the student loan. This helps the student to learn the best way to handle student loan debt.

If the choice is not to pay the interest but to let the interest of the student loan accumulate then this may also be capitalized. Capitalized means that it can be added to the principal balance resulting with the person paying interest on it as well. Then again if they do not qualify for either deferment or forbearance the next step is to negotiate a change in the repayment plan. Parents and college graduated adults for this reason should go to the Studentloans.gov website. There they can use a repayment estimator to see if they are eligible for a variety of payment plans and give them an estimate of monthly payments. This way they can begin to handle student loan debt in their budget.

Consolidate Student Loan Payments

However parents and college graduates might find that this simplifies to a onetime payment each month.  People need to look at all payment plans before making an important decision and learn how to handle student loan debt. These loans usually have a 30-year term which will increase the interest in the long run. This will also mean for the college graduate that they will be paying on the student loan until they are in their 50’s and have a family to take care of along with its responsibilities. Of course if the parents are paying for more than one child in college and financial responsibilities until that graduate student gets on their own. These individuals will be paying on student loans until their 60’s before the student loan is completely paid off.

In this case parents and young adults should compare any new payment to their current monthly payments to make sure the best option is a direct consolidation loan. Provided below is several types of loans that can be placed into a direct consolidated loan. People should check on the financial aid government website to see if there have been any changes to the loans for college students.

  • Direct subsidized/unsubsidized
  • Federal Family Education Loan Program (FFEL)
  • Parent Plus Loans
  • Federal subsidized/unsubsidized Stafford Loans
  • Supplemental Loans for Students (SLS)
  • Direct Plus Student loans
  • Federal Perkins Loans
  • Health Education Assistance Loans

A final point is there is a movement to forgive the debts of student loans. The following video discusses the idea of forgiveness and why it might not be such a good idea for the economy.

Good News – There May Be Help Coming On Student Loan Debts

Student Holding Past Due EnvelopeAn article appeared recently on the website Debt.org about the $986 billion that is now owed in outstanding student loan debts. This article pointed out that things could get even worse as there is a deadline coming on July 1 that will increase the Stafford Student Loan program’s interest rate to 6.8% from the current 3.4%.

How much do you or your graduate owe?

If you or one of your children is graduating this year, it’s probably graduating into a lot of debt. In fact, according to a recent government report this year’s class owes an average of $30,000.

The good news

The good news is that Sen. Kirsten Gillebrand a Democrat senator from New York, recently introduced a proposal to help with the $986 billion in outstanding student debt. It is titled the Federal Student Loan Refinancing Act. What it would do is force the Secretary of Education to automatically refinance student loans that are federally financed and carry an interest rate higher than 4% down to a fixed 4% loan. The education department’s documents show that about 75% of all federally financed loans have interest rates of either 6.8% or 7.9%. So as you can see, a drop to 4% could save people a serious amount of money.

More bills

The U.S. House of Representatives has several other bills pending that could help decrease the burden on those who have student loans. One of these is the Student Loan Fairness Act that would require borrowers to pay just 10% of their discretionary income on their student loans debts for 10 years. After that, whatever amount is remaining would be forgiven. And Representative Joe Courtney from Connecticut has a bill that would extend the current 3.4% interest rate on Stafford loans.

Not to be left out

The Republicans have not been left out of this movement to help with student loans as they have introduced the Smarter Solutions for Students Act. The goal of this act is to connect student loan interest rates to a formula based on the 10-year Treasury note plus 2.5%. This would take Congress totally out of the issue of setting student loan interest rates.

How about 0.75%

Sen. Elizabeth Warren from Massachusetts has introduced a Bank on Students Loan Fairness Act. This would not help people who already have student loan debts but would reduce the interest rate on all new student loans to just 0.75%, which is the same rate paid by our biggest banks when they borrow money from the Federal Reserve.

It just won’t go away

One of the biggest if not the biggest problem with student loan debts is that they just won’t go away. In fact, not even a chapter 7 bankruptcy can dismiss them. And our government is getting much tougher on people who fail to make payments on their federally financed student loans by turning over their accounts to debt collectors.

You do have options

If you’re swimming in a pool of student loan debts, you do have options. It’s possible that you could actually get those debts forgiven or at least extended so that your payments would be reduced. If you go to graduate school or into the military you could get your payments deferred for some period of time and ditto if you’re unable to work. If you were to go to work in areas such as law enforcement, emergency management, public health or early childhood education, you might be eligible to have your student loan balances forgiven if you’ve made at least 120 payments.

Finally, if you have a job but are earning less than you thought before graduation, you might be able to get your payment schedule changed from the standard 10 years to an extended 25 years. This would increase the amount of interest you would pay over the life of the loan but would decrease your monthly payment.

Click here to read the article on Debt.org