Student Loans: What You Need to Know

The Current State of Student Loan Debt in America

EVERY SECOND America’s student loan debt GROWS by $2,726!

In the last ten years, the total student loan debt in America went from $487 Billion to $1.363 Trillion as of the second quarter of 2016. WOW!

In the last five years, we have amassed more student loan debt than in all the years combined since the federal student loan guarantee programs started move than 50 years ago in 1965!

Scary stuff! Why has this happened? The increase in tuition is directly related to the free flowing market of student loans. If I were in the lending business, I would love to have a loan on the books that is not able to bankrupted.

More often than not, students and parents are forced to take out student loans to help pay for their college costs.

Loans come in two forms – federal and private (bank) – and no matter who you borrow the money from, you will need to repay it with interest so you need to understand the different types of loans and how they work.

Types of Federal Loans

Federal loans typically have lower interest rates and have more flexible repayment options (10 to 25 years), however the amount you can borrow is limited.

The types of federal loans are Perkins, Direct Subsidized Stafford and Direct Unsubsidized Stafford, and Direct PLUS.

Here are some quick facts to help you understand each… 

Direct Federal Stafford Loans

The student loan nearly every family will consider is the Direct Federal Stafford loan—subsidized and unsubsidized.

Direct Subsidized Stafford Loan: Direct Unsubsidized Stafford Loan
Need based Not need based
Available to undergrad students Available to undergrad & graduate or professional students
US Department of Education pays interest while in school and during grace period & deferment. You, not the government, pay interest while in school or defer. Interest will accumulate & be added to principal.
Grace period of 6 months after you leave school before repayment begins Grace period of 6 months after you leave school before repayment begins
Loan fee (deducted from disbursement amount): 1.068% from 10/1/15 to 10/1/16 and 1.069% from 10/1/16 to 10/1/17 Loan fee (deducted from disbursement amount: 1.068% from 10/1/15 to 10/1/16 and 1.069% from 10/1/16 to 10/1/17

Both the subsidized and unsubsidized have loan limits based on your student’s grade and dependency. (Dependent students whose parents were denied a Parent PLUS loan can borrow at independent student limits.)

Here is summary of the annual loan limits available under the Federal Stafford loan:

Grade/Year Dependent Student Independent Student
Freshman $5,500 (No more than $3,500 of this may be in subsidized loans.) $9,500 (No more than $3,500 of this may be in subsidized loans.)
Sophomore $6,500 (max. $4,500 subsidized) $10,500 (max. $4,500 subsidized)
Junior & Beyond $7,500 (max. $5,500 subsidized) $12,500 (max. $5,500 subsidized)
Graduate/Professional Students Not applicable $20,500 unsubsidized only
Cumulative Limit $31,000 (max. $23,000 subsidized) $57,500 (max. $23,000 subsidized)

Other Types of Federal Loans

Direct PLUS Loan:

  • Available to graduate or professional students as well as to parents of dependent undergraduate students.
  • Parents must be approved with a good credit history.
  • Can borrow up to the total cost of attendance less financial aid.
  • Repayment for graduate student is deferred until they leave school. Interest accrues and is capitalized.
  • Repayment for parents may be deferred if requested.
  • Loan fee (deducted from disbursement amount):  4.272% from 10/1/15 to 10/1/16 and 4.275% from 10/1/16 to 10/1/17.

Perkins Loan:

  • Available to undergraduate and graduate students with exceptional need.
  • You must be attending a school that participates in the Perkins program.
  • You have nine months after leaving school to begin repayment.
  • The amount you borrow depends on your need, amount available from the school since the school is the lender, and the other aid you receive.
  • The interest rate is 5.0%.

More information about federal loans is available from the Federal Student Loan website.

What’s going on with interest rates?

Here is a new schedule of rates for Stafford and PLUS loans:

Federal Student Loan Types Interest Rates
7/1/14 - 7/1/15 7/1/15 - 7/1/16 7/1/16 - 7/1/17 7/1/17 - 7/1/18
Direct Subsidized 4.66% 4.29% 3.76% 4.45%
Direct Unsubsidized - Undergrad 4.66% 4.29% 3.76% 4.45%
Direct Unsubsidized - Grad Student 6.21% 5.84% 5.31% 6.00%
Direct PLUS 7.21% 6.84% 6.31% 7.00%

What About Private Loans?

Private loans are made by banks and financial institutions and is the most rapidly growing section of education loans because the loan amount you can borrow is not limited.

Students and parents should only consider a private loan after they have maxed out all the federal loan money available to them. Interest rates, loan fees, and repayment terms can vary immensely.

Be careful to compare the payments you will face. Some banks will offer relatively low loan interest rates, but higher up-front fees. To compare, a 3 to 4% up-front fee equals a 1% higher interest rate.

Parents, you also need to be aware in many cases you will be required to be a co-signor on your student’s loan in order to obtain a competitive rate. Ultimately these loans could become your responsibility if your student is unable to repay them.  If you are not comfortable with co-signing, we recommend you have a conversation long before junior heads off to college.

Our Soap Box

After working with hundreds of families over the years, please allow us to get on our soap box.

We recommend you estimate your total loan balance and resulting monthly payment for your student’s ENTIRE college career BEFORE deciding on a school.


Some Final Things to Consider

Will the monthly payment be an amount you or your student can afford? Here is a good monthly payment calculator you can use to compare your loan options. As a rough estimate, for every $10,000 you borrow your payment will be $100 to $125 per month on the standard 10 year repayment schedule.

Your total balance should never be more than you anticipate making your first year out of college. Not sure what your student might be earning after they graduate? The Bureau of Labor Statistics has wage data on over 800 occupations to help you.

We talk so much about the student loan problem, but all the proposed solutions are reactive—after the fact—such as Income Based Repayment, Pay as You Earn, Public Service Loan Forgiveness, etc.

We need to shift our way of thinking, America.  We need a PROACTIVE plan to graduate on time with manageable student loan debt without robbing retirement!

Something else to consider: What if buying college was like buying a house? Check out our 3-Step Process to Pre-Approve Your College Choice for our ideas about proactive planning.

Remember…Know before you go!