Student Loans: Steps to Protect Yourself
As a general rule, take the following steps to protect yourself:
- AVOID the Direct (Parent) PLUS loan. This loan can have disastrous consequences, especially for low income families. It has high interest rate (currently fixed at 6.31% for the 2016-2017 academic year) that starts accruing with the first disbursement; a loan origination fee (4.272% of the total loan amount), less-friendly repayment terms, and a stringent credit check that make this loan much less desirable. It may appear in your financial aid package but you may later learn your parents do not qualify. Click here for more information on the Parent PLUS loan.
- BE CAUTIOUS with the Direct Unsubsidized (Stafford) Loan. The interest rates for the 2016-17 academic year are 3.76% for undergraduates and 5.31% for graduates and interest accrues while you are in school.
- DO NOT BORROW private bank loans to pay for college. With high and variable interest rates, cosigners required, and few (if any) deferment or forbearance options, these loans saddle students and families with extremely unmanageable debt.
- DO NOT BORROW more than $10,000/year unless you have a trust fund you can use to pay back your student loans. If you graduate in 5 years, you are looking at $50,000 in student debt. If you take 10 years to repay this loan at an average 5% interest rate, your monthly payment will be approximately $500. According to some repayment calculators, you will need a salary of $79,000/year to make this payment. On average, undergraduate students should be able to keep their annual debt at or below $10,000. Click here for more information on determining student loan payments.
Make sure you:
- READ your award letter carefully. Some of the aid listed may not be guaranteed. For example, your family may be offered a Parent PLUS loan which is dependent on credit approval. You do your math and it all adds up. You head to school and mid-semester find out your parents have been denied for this loan. You now have a balance you cannot pay. This will prevent you from registering for classes the following semester. You will not be able to get a transcript to transfer schools. You will have debt and no ability to move forward with your education.
- If you have to borrow, take Direct Subsidized (Stafford) Loan and the Perkins loan offered by the federal government. Both offer lower interest rates which are covered while the student is enrolled at least part-time. The Stafford loan has 6-month grace period and the Perkins loan has a 9-month grace period after students graduate before repayment will begin.