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Borrowing for College: Advice about Loans for Students and Parents

Suzanne Shaffer

If you’re the parent of a current college student, or of a high school student heading in that direction, statistics on student loan debt in the U.S. are worrisome. Here are the numbers:

  • Total student loan debt: $1.52 trillion
  • Total U.S. borrowers with student loan debt: 44.2 million
  • Student loan delinquency or default rate: 10.7 % (90+ days delinquent)
  • Total increase in student loan debt in most recent quarter:$29 billion

Zack Friedman from Forbes cites a recent study calling student loan debt a 1.5 trillion-dollar crisis “for borrowers across all demographics and age groups.” In fact, “student loan debt is now the second highest consumer debt category — behind only mortgage debt — and higher than both credit cards and auto loans.”

No one wants their student to graduate with mounds of debt and start their adult life struggling to survive on their entry-level salary. The good news: every parent can educate their student on student loan borrowing to avoid unmanageable debt after graduation. To do this, it helps to understand some key factors: the types of student loans available, borrowing guidelines, repayment calculations and loan interest information.

What types of student loans are available?

There are two types of loans available for students: federal loans, which include student borrowers and parent borrowers, and private loans, which usually involve a parent co-signer. Federal loans are preferred over private loans since the interest rates are lower and the repayment terms are more flexible.

Federal student loans are offered as subsidized and unsubsidized. With the Federal Direct Subsidized Loan, the government pays the interest while the student is in college. With the Federal Direct Unsubsidized Loan, the government collects interest while the student attends college. With both loans, the student must complete the FAFSA to qualify.

FAFSA Updates and College Financial Aid Information

Parents may also qualify for a Parent PLUS Loan to pay for college. Payments begin when the loan is disbursed. To be eligible, the student and family must complete the FAFSA and a parent can’t have an adverse credit history.

If you feel private student loans are necessary, it’s important to compare lenders for rates and repayment terms. Be mindful that private lenders don’t allow for deferment and/or forbearance. NerdWallet provides a list of the 7 Best Private Student Loans of 2020.

What guidelines should your student follow when borrowing?

You don’t have to accept all the student loans offered in your student’s financial aid package. You can decline any loans offered each year financial aid is awarded. Many students sign on the dotted line at the financial aid office each year, without paying enough attention to the total amount they’re borrowing and what that means for what they’ll be required to repay each month after graduation.

Your student should stay on top of their loans, knowing the full amount borrowed, interest rates and repayment terms. In a previous CollegiateParent article on this topic, Jodi Okun of College Financial Aid Advisors recommended that students not borrow more than they expect to earn their first year out of college. “For example, if a student expects to make $45,000 their first year working out of college, a good rule of thumb for the student is not to borrow more than $45,000 for their entire college education.”

Your student should have a goal of making small payments while in college, even if it’s only the interest that’s accruing. These small payments will make a helpful dent in the total loan amount after graduation.

How can you use repayment calculators to determine borrowing limits?

Repayment calculators will help your student determine their financial obligation for repaying the student loans. They’re easy to use — your student simply enters the amount borrowed and the interest rate to determine the amount of payment. It’s an essential reality check!

Using the Federal Repayment Calculator, you can see that borrowing $100,000 for college will require a $1,150 payment each month after graduation for 10 years. Repayment calculators are invaluable loan planning tools.

There are many different types of repayment calculators — Student Loan Hero provides a comprehensive list.

What are the current student loan interest rates and will they remain fixed?

In July 2019, federal student loan interest rates dropped for the first time in three years. Once you lock in a loan, your loan rate won’t change for the duration of the loan; any potential increased rates will only apply to new loans.

For 2019–20, the federal interest rate for undergraduate student loans is 4.53 percent, 6.08 percent for unsubsidized graduate loans, and 7.08 percent for Parent PLUS loans. For more information on student loan rates and borrowing for college, read "Borrowing for College Just Got a Little Less Expensive."

When should parents borrow to help fund their children’s higher education?

According to the Consumer Financial Protection Bureau, parents are taking on more student loan debt than ever before to help their students pay for college. Because college costs are rising, it can be tempting to take out loans or dip into your retirement funds.

The wiser approach would be to guide your student toward an affordable college choice — one that doesn’t require either of you taking out loans but rather is financed by funds you can afford, scholarships and merit aid. If you do borrow to pay your student's college bills, be careful not to compromise your financial future. Here are five guidelines to follow from Consumer Reports.

With college costs rising, and more families making the choice to borrow, you should be well-informed about student loan options, repayment plans and the consequences of borrowing more than you and your student can comfortably afford to repay.

Suzanne Shaffer counsels students and families through her blog, Parenting for College. Her advice has been featured in print and online on Huffington Post, Yahoo Finance, U.S. News College, TeenLife, Smart College Visit, Road2College and more.
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