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Paying for College with Student Loans – What are the Options? | Financial Planning Tips

Paying for College with Student Loans – What are the Options?

Managing personal finances and budgeting can be a challenge for students who have never lived away from home. Not only do some students take out loans to pay for their higher education but also private loans for living expenses while they attend college. These loans can accrue interest before they have even graduated leading to hefty student debt after they graduate and high interest loans that some students are unable to pay back. However there are a number of options available, particularly for students from low income families who qualify for subsidized Federal loans.

Subsidized Versus Unsubsidized Loans

Subsidized loans are loans given to students from low income families. The interest is paid by the Federal government while the student is attending college. Unsubsidized loans are loans where the interest accrues as soon as the loan is taken out and during the lifetime of the loan.

Two common Federal loans are the Stafford loan and Perkins loan. Stafford loans can be either unsubsidized or subsidized. Perkins loans are subsidized and are given to the neediest students. While Stafford loans do not have to be paid back until six months after the student graduates, Perkins loans have a nine month grace period which means the student does not have to begin repayments until the tenth month upon graduating.

Federal Loans versus Private Loans

Federal loans have a number of advantages over private loans. Firstly some Federal loans are subsidized and repayments do not begin until well after the student has graduated. Secondly the average private loan carries an interest rate of around 12% which is double what Federal loans charge. There are also more payment options available for those taking out a loan backed by the Federal government. For example payments can be stretched out over a longer period of time and recent legislation means that monthly payments are based on the borrower’s income.

If you have completed 10 years in a public service job and have made 120 payments towards a Federal loan you may be entitled to loan forgiveness. Loan forgiveness is a program whereby your loan is forgiven or erased so that you do not have to pay back any outstanding debt on your loan. These programs have been a lifeline for students struggling to pay off debts, particularly during these difficult financial times.

The downside of subsidized federally backed loans is that they are currently capped with a limit of $27,000 over four years for students who are considered dependents and $45,000 for independent students. Due to the increasing cost of college education and extra money required for living expenses many students opt for both federal loans and private loans. Unfortunately this increased debt burden has resulted in many students defaulting on their loan and financial hardship for those who cannot afford the monthly payments.

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