Student Loans (UXL) Student loan debt has risen alarmingly in the last several years. (Student loans are loans that help students pay for college tuition, books, and living expenses.) Going to college has become extremely expensive, as the costs that colleges face have also risen. (See the chart How U.S. Universities Spend Money.) In 2014, borrowers owed $1.2 trillion in student loans, up 84 percent since 2008. Over 70 percent of graduating seniors in the class of 2014 had student loans, up from less than half of the class of 1994. In 2014, the average student loan debt was just over $30,000. The good news is that an education is likely the best investment a young person can make. In almost every industry, workers with college degrees are paid more than their counterparts without one. According to the Federal Reserve Bank of New York, during the period between 1970 and 2013, workers with a bachelor's degree earned about $15,000 more per year than those with an associate's degree and $23,000 more than workers with only a high school diploma or GED. Although the financial return on a degree often depends on the field of study a student chooses, there is no question that, in general, workers with college diplomas earn more. Employers tend to judge those with college degrees as having proved themselves fairly intelligent and capable of seeing projects through to completion; these attributes are highly valued in the workplace. College students have many options available to help pay for their education, including student loans, grants, scholarships, and financial aid. BILL BACHMANN/ALAMY A college education has also been shown to have several intangible benefits. People who have been to college are more likely to make more healthful lifestyle choices, such as exercising more and not smoking. They are better at handling challenges and more likely to be satisfied with their jobs. They donate more time to volunteer activities, and they are two and a half times more likely to vote. Parents with advanced degrees are three times more likely to read to their children than parents who have not finished high school; as a result, their children enter school better prepared and are more likely to excel in school themselves. This is not to say that students should take going into debt to get a higher education lightly. Student loans must be repaid with interest. Financial planners recommend being careful with student debt. Students should never take out more money than they need and should not spend the money on items that do not contribute to their education. A good rule of thumb is for students to calculate the salary they expect to get
in their first year out of college. (Such statistics can be found in the Occupational Outlook Handbook, available in print or online from the Bureau of Labor Statistics.) The total debt for a four-year education should not exceed that salary. Borrowers who can keep their first-year loan payment below 10 percent of their salary should be able to comfortably repay their loan within ten years. How U.S. Universities Spend Money Kunal Jasty. Where Does All That Money Go? Radio Open Source, May 17, 2014. http://radioopensource.org/college-budgets (accessed December 12, 2014). CENGAGE LEARNING Students who borrow money for their education should make sure they get the education they paid for. Students who drop out of school still have the debt but do not have the credentials that might lead to a better-paying job. Furthermore, students who are not engaged in their studies risk emerging without the skills they need to compete. Students who invest money in their education without investing time and effort are likely to regret it later. Paying for college There are many ways to pay for college, including some non-loan options. Before taking out loans, students should consider grants and scholarships, as well as work-study programs. A grant is a sum of money given to an individual or organization for a particular purpose. Scholarships are monetary payments made to support a student's education. Grant and scholarship recipients are not charged interest and the money does not have to be paid back. Grants and scholarships are offered by the government, schools, businesses, charitable organizations, and wealthy individuals. Some grants and scholarships, like federal Pell Grants,
are based on the student's need for the money. Others, such as National Merit Scholarships and athletic scholarships, are given solely on the basis of a student's achievements. Others are given for service to society, such as the TEACH grants available for students who plan to become teachers, or grants to armed services veterans under the GI Bill. Some are given on the basis of a student's ethnic background or what field they want to study. Many such resources are not well known or publicized and need to be researched. Good resources for finding scholarships are available online, including FastWeb, the Pay for College section of http://collegeboard.com, and http://collegeanswer.com. Finally, students and parents should be aware that there are some organizations looking to take advantage of them, offering fake grants and scholarships or ones with strings attached. Borrowers should be wary of services that offer to help students find money for college, especially if they use high-pressure sales tactics or guarantee that the student will receive a scholarship. Students and parents should research any organization to make sure it is legitimate before giving out credit card numbers or personal information. Work-study is a federally funded program that provides part-time jobs to students to help them pay for college. The program tries to find work related to a student's area of study, so the jobs can be on campus or off campus. Often these jobs involve serving the community, so there is a benefit both to students and the community at large. Types of loans Even within the student loan industry, there are more than fifteen different types of federally guaranteed student loan programs; that is, programs where the government acts as a guarantor or cosigner on a student loan. There are also loans that are partially subsidized (paid for by a third party) by the government, where the government pays part of the loan, either by giving students lower interest rates than they could have gotten in the private market or by paying the interest while students are in school. Some loans come directly from the Department of Education or the school the student attends; others come from private lenders. Each loan has different interest rates, different amounts that the student can borrow, and different payment terms. The following is a list of some of the common types of loans available to students, with the most advantageous listed first: Perkins loans. Perkins loans are offered to students from low-income families who need help to pay for college. Because the loans are federally subsidized, students can borrow money at 5 percent interest, and the government pays the interest charges while the students are in school and for ninety days after they graduate. Students have up to ten years to pay the money back. Stafford loans. There are two kinds of Stafford loan. For loans through the William D. Ford Federal Direct Loan Program, the student borrows directly from the Department of Education through his school. Stafford loans can also be private loans from banks through the Federal Family Education Loan (FFEL) Program. Both direct loans and FFEL loans can be subsidized, with the government paying some of the interest, or unsubsidized. Stafford loans are usually made over a period of between ten and twenty-five years, though they may be repaid early. PLUS loans. Formerly known as Parental Loans for Students, these loans are made to parents with good credit so they can help their children pay for college. Graduate and professional students can also take out PLUS loans to help pay for their education. Like Stafford Loans, PLUS Loans can come directly from the government or indirectly through banks. Either way, though, PLUS loans are not subsidized, so the lender charges interest from the date the loan is issued until it is paid in full. Also, unlike Perkins or Stafford loans, payments are due two months after the student receives the money, not after the student graduates. State and school loans. In addition to the loans offered by the federal government, many states sponsor loan programs. Occasionally, colleges and universities offer loan programs as well. Consolidation loans. For borrowers with multiple school loans, the Department of Education offers consolidation loans, which allow borrowers to replace multiple loan payments with just one.
Borrowers who consolidate their loans might lose some of the special benefits the original loan provided, but it might also lower the interest rate on the debt or increase the time the student has to pay off the loan. Private loans. Many banks will make their own education loans to students or their parents. For these loans, the interest rates and payment terms are determined by the bank, and they are generally less favorable to students than are government loans. Students usually take these loans only after they have reached the limit of what they can borrow from other loan programs. Applying for student loans Students only need to fill out one kind of application to apply for all kinds of federal financial aid: the U.S. government's Free Application for Federal Student Aid (FAFSA). The FAFSA determines whether students are eligible for federal grants and scholarships as well as loans. Many states and colleges also use the FAFSA to determine who is eligible for state- or school-sponsored monies. The FAFSA is free; any website that requires applicants to pay an application fee is not the FAFSA. Students fill out the FAFSA in January of the year they plan to start college. The form is available online at http://www.fafsa.gov. Doing some research before filling out the FAFSA can be helpful, since the information required is quite detailed. Students will need their parents' tax returns (or their own, if they are independent), records of any untaxed income, and information on cash, savings and checking account balances, investments, real estate, and business assets. Applicants should also note their expenses, such as rent, income tax, and child support. Once the FAFSA is done, the process is easy. The Department of Education sends the information to the colleges that the student wants to apply to. Each college then puts together a financial aid package consisting of grants, loans, work-study positions, and scholarships. If different schools offer different amounts, students can sometimes use the difference to negotiate a better financial aid package at their preferred institution. Even if they cannot offer more, college admissions offices can often help students find other grants and loans that they might be eligible for. Repaying student loans Different student loans have different options for repayment. Borrowers who use the standard plan pay off their loans quickly and pay less in interest, but the monthly payments are higher than those in the other plans. For borrowers who have trouble making those monthly payments, there are several ways to lower payments by extending payment time. Borrowers should be aware, however, that extending the loan period means paying more interest. Some available repayment plans include: Graduated plans: These are geared to students whose jobs immediately after college are typically relatively low paying but will increase over time. Monthly payments are low at first and then increase every few years to reflect that change. Extended plans: These are for students who have low incomes or high expenses. Payments are extended over twenty-five years. Income-based plans: These plans are based on the borrower's income. Some of these plans require a degree of financial hardship, and most stretch the payments out over a longer period of time. Such programs are good for students who graduate during a recession (a period of economic decline), or whose degrees did not give them the kind of job or wage level they had planned on. Payments under these programs change if the student's income changes, and if the student has not paid back the full amount by the period's end, the balance is forgiven.
Deferment and forbearance If necessary, borrowers can temporarily stop making payments on their student loans. Deferments give students a period of time when they can defer (put off) making payments until later. Forbearance is an agreement whereby the bank or loan servicer forbears (stops) collecting loan payments. Both deferments and forbearances are mixed blessings. They allow students to a break from paying the money back for a period of time, but unless interest is federally subsidized, banks still charge interest on the loan during the break. For some loans, interest starts adding up even before graduation. And as with any debt, interest is added to the principal, so the debt increases with time. Even so, most students at some point need a deferment, even if only while they are still in college or graduate school. Payments can also be deferred if the student is on active duty in the military, if the student is in the National Guard, if the student has a temporary disability, if the student is engaged in a public service such as teaching in a disadvantaged area, or if the student is a working mother who must pay for child day care. Loans can also be deferred for up to three years if the student is unemployed or suffering financial hardship. There are two kinds of forbearance: discretionary and mandatory. A lender has the discretion, the right to use their own judgment, to stop collecting payments for any reason. Borrowers can be granted forbearance if they are suffering from illness or financial hardship, for example. Forbearance is mandatory, or required, if the borrower: Is serving in a medical or dental internship or residency program. Is serving in a national service position such as AmeriCorps and has received an award. Is teaching in a disadvantaged area that qualifies for teacher loan forgiveness. Is a member of the National Guard whose unit has been activated. Has loans that are repaid by the U.S. Department of Defense. Has student loan payments totaling 20 percent or more of the borrower's monthly income. Forgiveness, cancellation, and discharge For students interested in serving the public or who are suffering severe hardship, there are ways that student loans can be canceled or forgiven. People who can have some types of loans canceled, partially paid, or forgiven include: Members of the U.S. military. Teachers who teach in areas where there is a teacher shortage, or who serve low-income or disabled students. Educators, therapists, nurses, nutritionists, and other employees of public or nonprofit agencies in needy areas. Students who serve in AmeriCorps, Peace Corps, VISTA, ACTION, or other designated public service organizations. Doctors, nurses, and other health care professionals who work in areas where health care workers are seriously needed. Full-time law enforcement and correctional officers. Loans can also be canceled if the borrower becomes permanently totally disabled, if the student attended a trade school that closed before the student could get her degree, or if the student dies. Finally, although it is difficult to discharge student loans by declaring bankruptcy, it is not impossible. Bankruptcy courts can discharge student loans if the loan payments keep the borrower from being able to
sustain a minimum standard of living, if the borrower's financial situation is unlikely to change in the future, and if the borrower has made a good-faith effort to pay the loans. "Credit and Debt." UXL Money: Making Sense of Economics and Personal Finance. Julia Garbus. Ed. Shawn Corridor. Vol. 3: Personal Finance. Farmington Hills, MI: UXL, 2015. 561-596. Web. 19 Aug. 2015. URL http://go.galegroup.com/ps/i.do?id=gale%7ccx3626800026&v=2.1&u=oreg77062&it=r&p=gvrl&s w=w&asid=ffc04e1d5a01a0bba14bff6543d22fb7