In our September 7th post we discussed the do’s and don’ts of student loans. Do you know all the types of student loans that are available to pay tuition? Do you know which loans types have been affected by the CARES Act?
Before taking out loans to pay your tuition bill, you should always apply for financial aid. To apply, complete the Free Application for Student Aid (FAFSA). This determines if you are eligible for any government aid assistance. Filling out the FAFSA form generally takes less than an hour and could potentially get you grants, many that do not have to be paid back. The FAFSA also determines your eligibility for federal student loans. You can complete the form electronically at FAFSA.ed.gov. If you are dependent of your parents, you will need your parents to answer their financial information on the application. If you need help filling out the form, you can contact the financial aid office at your college, ask a family member, or a friend who has been through the process recently. Planning with Purpose can assist you in completing the FAFSA.
To be eligible for Federal Student Aid you must: qualify to obtain a college or career school education (i.e. have a high-school diploma or General Education Development certificate (GED)), be enrolled or accepted for enrollment as a student in an eligible degree or certificate program, and be registered with Selective Service if you are a male. You must have a valid Social Security number, not be in default on a federal student loan or owe a refund on a federal grant, and you agree to use the federal student aid only for educational purposes. You must be either a U.S. citizen, U.S. national, have a green card, have an arrival-departure record, have battered immigrant status or have a T-Visa in order to be eligible to receive Federal Student Aid.
Many states offer aid, as well. Here in NY, the program is known as the NYS Tuition Assistance Program (TAP). TAP is one of the grants, scholarships, and awards programs administered by the New York State Higher Education Services Corporation. You can apply for NYS TAP at HESC.ny.gov. When you apply using the FAFSA, you can request that your financial information be sent over to HESC.ny.gov and avoid having to input all your financial information twice.
There are two categories of student loans: federal and private. Federal student loans can provide flexibility that private loans do not. Undergraduate borrowers do not need a credit check to be considered for federal loans. Federal PLUS loans for parents and graduate students do require a credit check. Some federal loans programs offer income-driven repayment plans, where the payments are based on the borrower’s salary after college. Federal student loans allow the borrower to change their repayment plan even after they have taken out the loan.
Currently, due to the CARES Act, outstanding federal student loans have a 0% interest rate and payments have been suspended through December 31, 2020. There is no penalty for making your student loan payments during this payment suspension.
With federal student loans you will often see the terms direct subsidized and direct unsubsidized loans. Direct subsidized loans are intended for students with “exceptional financial need”. The government subsidized the interest on the loan while the student is enrolled at least half-time in school. This means the borrower is not charged interest on the subsidized loans until they have graduated. There is a six-month grace period after leaving school before loan payments need to be made. We recommend you make payments as large as possible during this period to shorten the time you have to make payments and reduce future interest charges.
Direct unsubsidized loans are available to students regardless of their financial need. The interest begins accruing as soon as the borrower or college receives the funds and continues to accrue until the loan is repaid in full.
Federal student loans also have what is known as a Direct PLUS loan, commonly referred to as a Parent PLUS loan. Funds may be borrowed up to the cost of attendance minus any financial aid received. To be eligible for a Parent PLUS loan you must: be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time in an eligible school, not have an adverse credit history, and meet the general eligibility requirement for federal student aid. It is important to note, the parent, not the student is legally required to pay this loan back. If the student has agreed to make the loan payment, it is the parent’s credit history that is negatively impacted by any missed payments. The parent is legally responsible for the loan repayment.
A second Direct PLUS loan program is available for graduate and professional students, known as the Grad Plus loan. To be eligible you must be a graduate or professional student enrolled at least half-time at an eligible school program leading to a graduate or professional degree or certificate, not have an adverse credit history and meet the general eligibility requirements for federal student aid. Just like with the Parent PLUS loan, funds may be borrowed up to the cost of attendance minus any financial aid received. If you have an adverse credit history, you may still be able to obtain a Direct PLUS loan with a cosigner who agrees to make the loan payments if you are unable to do so. The FAFSA form is required to be completed before applying for Direct Plus loans.
If a student needs additional funding, they can apply for a private student loan through a bank, credit union, or other financial institution. Private loan programs usually offer a choice of a fixed or variable interest rate, whereas federal student loans have a fixed interest rate. There are different repayment plans available allow the borrower to make interest-only or fixed payments while in school. Depending on the credit worthiness of the borrower, a cosigner maybe required. Private loan programs often allow borrowing up to the cost of attendance less any financial aid received. Private student loans require the borrower apply directly with the bank or credit union.
Be aware, it is not uncommon for private lenders to advertise a lower interest rate for the in-school and grace period, with a higher interest rate going into effect when the loan enters repayment. Lenders may also show a lower interest rate but have higher “loan fees” which makes comparing private student loans difficult. The CARES Act did not make any provisions for private student loans. Your lender may have chosen to suspend payments or interest at this time, but it is not a legal requirement.
Did you know that if you file for bankruptcy, your federal student loans will not be canceled? This can only be done with private student loans. There are many different student loan forgiveness programs out there that you may be eligible for. Each program has its own eligibility requirements which may help with getting some or all your student loans forgiven. The student loan forgiveness programs only apply forgiveness for federal student loans, not private loans.
When applying for tuition assistance look at all avenues to help you make the best decision on where and what type of funds to take out for your situation. Student loans should only be considered after grants and scholarships that do not need to be paid back. Paying as you go by making installment payments is preferable rather than incurring the debt. Contact your financial aid office at your college, ask a friend or family member, or give Planning with Purpose a call at 607-729-4144 for assistance. We would be glad to help!